The Challenges Facing Home Depot
Home Depot (HD) will cross the earning season finish line as one of the last companies reporting but that won't diminish its importance. To the contrary, this may be one of the more telling reports. I'm not as interested in Q2 as I am in the outlook of Q3 and the second half of the year.
Being so late in the season, Home Depot's outlook should be more inclusive of tariff impact as well as low interest rates. We may be able to infer if a pickup in housing can offset the negative influence of tariffs.
Home Depot faces other challenges as well with lumber deflation acting as the largest negative. Same-store sales have been the other major concern for bulls. These two factors along with tariff concerns have created low expectations for Q2 and muddled views on the second half of the year. Management already lowered FY EPS from $10.09 to $10.03 in their Q1 report back in May. I believe a simple confirmation of $10.03 will stave off the bears.
It's difficult to expect much movement from earnings, one way or another. We have to go back 15 quarters, almost four years, to find a day when even the intraday move on Home Depot exceeded 4%, the current pricing expectation in the options market for the move this week. Only once in the past 14 quarters has Home Depot moved greater than 4% the five days following its earnings report. It did so two years ago when the stock moved 4.4% lower by the fifth day. Therefore, the pricing of $8.15 to $8.20 on the $207.50 straddle while the stock was trading at $207.42 earlier today appears to be at the high end of historic reactions.
That's not to say there isn't risk into this report. Home Depot has been riding a very clear trading channel dating back to the beginning of the year. Even a mild disappointment to the results could cause the stock to drift below support this week. The tails of the past two weeks, currently around $200, could act as a secondary support. That's where I would plant my yellow flag. A weekly close below $200 would likely cause another 5%-6% downside in shares over the next few weeks. A close above $212 will keep us firmly entrenched in the trading channel putting the $220 to $225 range on my radar. While I don't like trying to play the stock into earnings, I do think the setup provides a clear path to trade the stock post-earnings, so that's my plan.
(Home Depot is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells HD? Learn more now.)
At the time of publication, Timothy Collins had no position in the securities mentioned.