Home Depot Has Long Cemented Its Position as a Hardware-Store Leader

Home Depot (HD) is literally one of my favorite stocks of all-time. While I do invest for the long-term, I'm an active trader and few of my trades actually last long enough to be measured in years. My current long position in the name was established in 2014. No, my net basis is not around $70. I have added and reduced the position over the last five or so years. In fact, I let a few shares out in response to President Donald Trump's tariff tweet on Aug. 1. That said, I will wear a few shares into Tuesday's earnings release. 

The stock has had what looks like a good year, up 20% or so just this year. That's vs. 16% year-to-date performance for the S&P 500, and a rough 3% for chief competitor Lowe's (LOW) . That firm reports on Wednesday. For the Home Depot's second quarter, the industry is looking for earnings per share of $3.08 on revenue of $31.03 billion. As to earnings per share, the whispers are running a few pennies above consensus, while for revenue, realization of this expectation would amount to year-over-year growth of 1.9%. 

Nuts an Bolts

The fact is that Home Depot is the unchallenged leader in the home improvement space. Yes, the firm does have to tangle with the trade environment as do other retailers, but perhaps to a lesser degree. Yes, the firm does have to tangle with the likes of Amazon (AMZN) , and other e-tailers. That said, Home Depot has a strong internet presence of its own, and when the water comes rushing into your basement, and you don't have what you need to deal with it, or you're working in the yard and can't find the precise tool for the project at hand, you are not logging onto the internet if a Home Depot store is nearby. Then there are the contractors. Should one or two or 25 of those guys need 65 pound or 80 pound bags of cement, or 200 two-by-fours, they aren't ordering online, either. 

Consider a few items from the first quarter. The immediate response to those results was sideways to negative, before the shares took off. That was likely due to some compression in operating margin. That is despite that operating margin held steady and management re-affirmed full-year guidance. That guidance included ballpark comp store sales of 5%. That really puts management on the hot seat on Tuesday morning and challenges a firm known for excellence in corporate execution to reach for a higher level. This item is where I expect the market's knee-jerk to come from.

All that said, investors have to keep in mind that HD pays out an annualized dividend of $5.44. That's a yield of 2.67%, but think of that. Hold the shares for a year, and net basis is driven down by $5.44. Not a lot of stocks this expensive in dollar amount can help the investor on both ends the way Home Depot can. In addition, let's not forget, this firm has a history of being a cash-flow machine, and in addition to the attractive dividend, the firm announced back in February a $15 billion share repurchase authorization that could reduce shares outstanding by roughly 7% if run to completion. 

The politicians can fight over the repurchase of shares as a valid use for cash flow. As an investor, I would rather be on the same side of aggressive management than not.

The Chart

As a trader, I am not thrilled that this stock has to re-tale the 208 pivot point created by the red-cup-with-handle pattern. The sell-off that ensued was tweet-driven, and this fund driven. For me, I see this pivot point and the 50-day simple moving average of $209.75 as one. A failure here, and we have to worry about the 200-day line. A positive reaction to the digits, or guidance on Tuesday morning, and I see no reason why this stock can not resume trend. My target price is $255. For those just looking to make a buck, the Aug. 23 $197.50 puts are still paying close to a dollar. The shares have found support just above that area twice in the immediate past. Of course there is some potential equity risk associated with selling such an options position.

Amazon and Home Depot are holdings in Jim Cramer's Action Alerts PLUS member club.

At the time of publication, Guilfoyle was long on HD equity.