Stock Trade of the Week: Home Depot (HD)

Home Depot (NYSE: HD) – most of you are probably familiar with the home improvement retailer, but for those readers that might not be, the company sells home improvement products. They have everything from plumbing supplies to cleaning supplies.

The stores are huge facilities with outdoor centers that sell landscaping and gardening supplies and they have lumber supplies as well. The customers range from the do-it-yourself crowd to professional contractors. Home Depot is headquartered in Atlanta, Georgia and was founded in 1978.

Home Depot is a little mixed in regards to its fundamental indicators.

Earnings have grown by 21% per year over the last three years, but they were only up 1% in the most recent quarterly report.

Sales have increased by 6% per year over the last three years and they were up by 4% in the most recent quarter.

The profit margin for Home Depot is 13.7%, but there are mixed readings on the company’s return on equity.

Investor’s Business Daily and the Wall Street Journal don’t show an ROE, but Yahoo Finance shows it at almost 10,000%. This is likely due to a calculation of the earnings and which items are included and excluded. The company’s operating margin is 14.6% and the return on assets sits at 25%.

The stock is trading at a P/E ratio around 22 and it does pay a dividend with a current yield of 2.5%.

As for the sentiment toward Home Depot, it is average but it has been moving toward a more bearish stance. There are 32 analysts covering the stock at this time with 20 “buy” ratings, 11 “hold” ratings, and one “sell” rating. This puts the buy percentage at 62.5% and that is slightly below average.

The short interest ratio sits at 2.1 right now and that is a little below average.

Home Depot fell after its most recent earnings report disappointed investors. Personally I think the selloff has run its course and may even be a little over done. The stock has been moving higher over the past year and a trend channel has formed.

The upper rail of the channel connects the highs from the last 14 months or so while the lower rail is a parallel line that is affixed to the low from last December. The stock just hit the lower rail of the channel.

The weekly stochastic readings reached oversold territory for the first time since the fourth quarter of last year, but the indicators just made a bullish crossover. When we have seen this in the past, it has been a good buying signal for the stock.

Suggested strategy: Buy HD with a maximum entry price of $221.00. I would set a target of at least $280.00 over the next 9 to 12 months. I would suggest a stop loss at the $205.00 level.

— Rick Pendergraft

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