Selling on the stock market: Is Home Depot a buy?
Economists may have been surprised by the jump in inflation in August as they mainly saw the cost of energy falling sharply. But consumers knew it was still costing them more to put food on the table and buy clothes, cars and medicine. So-called core costs jumped nearly 7% for the month and food costs climbed 11.4%, the biggest 12-month increase since 1979.
The stock market reacted to the news as one would expect with the Dow Jones Industrial Average drop of 1,300 points, or 4%, and the S&P500 losing a similar percentage with just five stocks in the popular index ending in positive territory.
Home deposit (HD 1.63%), which holds a spot on both the Dow and S&P indexes, fell 6.5% in the aftermath as the likelihood increases that the Federal Reserve will raise interest rates by at least another 75 basis points when of its meeting later this month. We may be heading into an official recession.
Housing starts fell 14.4% last month, mortgage rates topped 6% and 63% of small businesses are suspending hiring of new workers, according to a survey by small business networking specialist Alignable.
It’s certainly a gloomy outlook, which may have investors wondering if they should wait to buy the home improvement center’s shares. Still, there are some very good reasons to think now might be the time to buy The Home Depot.
Hit close to home
A downturn in the economy would certainly impact Home Depot, as would other retailers, as consumers prioritize spending on basic necessities over luxuries. Building an addition to a home can be postponed until better times, and even now it hasn’t been easy to find supplies and materials amid the supply chain rumble.
About 90% of The Home Depot’s business comes from the housing market, either directly from DIY homeowners or indirectly through professional contractors. Contractors alone account for 45% of Home Depot’s total sales, so it’s far more dependent on them than its competitor. Lowe’swhere they represent only 20 to 25% of turnover.
Building for the future
And yet, the housing market remains surprisingly resilient so far. Despite inflation, high energy costs, supply chain disruptions, etc., housing prices have not collapsed. This is because there is still a high demand for homes, but a low inventory.
CNBC reports that there was a 27% increase in housing supply in early September, but inventory still remains 43% below its 2019 level. There will come a time when equilibrium will be reached, but we’re not there yet and that’s going to keep the visitor centers active for a while.
And when people don’t buy new homes, they choose to renovate the ones they already have, as happened at the start of the pandemic. They also take care of the exterior of their homes, leading to increased sales of gardening and painting equipment and supplies. Indoor and outdoor gardening accounts for more than 17% of Home Depot’s total revenue, the largest segment of all, while painting accounts for another 7%.
Home Depot (and Lowe’s, for that matter) isn’t recession proof, but it does have its own resilience.
Profit sharing with shareholders
And then there’s the Home Depot dividend to sweeten the deal. It has made a payout to investors every year for the past 35 years, and the dividend is currently yielding 2.7% per year.
Dividend stocks have historically outperformed non-paying stocks by a wide margin. Although a dividend payout is rarely enough to offset a decline in capital appreciation, it is a vote of confidence in the future to prevent investors from acting recklessly by saying that a company will continue to share a percentage of its profits.
And that’s why Home Depot is a buy, even if investors aren’t catching the exact bottom. You never know when the markets will reverse course. Over the past 20 years, the stock market has grown an average of 9.5% per year, but if you missed the top 10 market days, your returns would be nearly halved to 5.3% per year.
Time in market is more important than market timing, and Home Depot has been a strong performer over time. Wall Street still expects its earnings to grow 16% annually, so the discounted stocks received in 2022 should be the perfect time to buy its shares.