Speculators buy tomorrow and sell today. Investors can get bargains if they believe in yesterday. Home Depot (NYSE:HD) provides a good example of this market principle. HD stock ran up from a pandemic low of $152 last March to a high of $286 in August. They then bounced around for months before falling 11% in the last month.
The catalyst? Record earnings and a dividend increase. Sales for the fourth quarter were $32.3 billion, up 25% year-over-year, at scale. Net earnings per fully diluted share rose 14%, to $2.65. The dividend was hiked 10%.
Speculators responded with sell orders. They were taking profits. Investors who waited out this process and walk in today, however, can get a dividend yielding 2.56% over the next year and a forward price-earnings ratio of 20.8.
Why They Sold
Traders and speculators like bright shiny objects. A year ago, when we were locked inside our homes for the first time, Home Depot was a bright and shiny object.
Those promises have been fulfilled. As Placer.ai noted in a February report, on Home Depot and its rival Lowe’s (NYSE:LOW), Home Depot visits were up 22% year-over-year in January. They have been up by double digits for every month since last May.
The stock charts tell a different story. The performance of Home Depot shares began trailing the S&P 500 average in December. That underperformance has only accelerated this year. Since the start of 2021, Home Depot is down nearly 7%.
Those who took profits ran to today’s bright and shiny objects. SPACs, electric car plays, fintech, and Bitcoin (CCC:BTC-USD) are as hot today as Home Depot is cold.
Why Investors Buy
This provides a great opportunity for baby boomers to secure their retirement.
The pandemic has created permanent changes in housing and office patterns. Most knowledge workers are no longer interested in going back to the office. Office leases are being allowed to expire. Homes need to expand, however, to accommodate the new home office. Better use must be made of the remaining space. This means a lot of work, not just for consumers, but for builders and contractors. Projects will have to be redesigned, and existing office space repurposed.
For retailers like Home Depot, meanwhile, the spring quarter is Christmas. Planting season is profit season. Projects dreamed of in the cold become reality when it gets warm, and hopefully before it gets hot.
HD stock is selling for barely half the average S&P stock’s price to earnings ratio, which is over 38. The Shiller ratio, which is adjusted for inflation, is 34.
While stock chartists see Home Depot stock going lower over the short, medium, and long terms, analysts at Tipranks have a more upbeat view. Nine out of 10 say buy it. Their average one-year price target of $315 is 27% ahead of where the stock trades now.
The Bottom Line On HD Stock
The peak of the baby boom, in the mid-1950s, is retiring over the next few years. I was born in 1955. I’m feeling a little cranky and creaky myself.
Here’s how to get your kids to pay for those cruises, weekend getaways and even those long-term care homes you’ve been dreaming of.
Now is the time to buy Home Depot. Take the 2.5% dividend, watch the growth from changing housing patterns, and relax.
This is the difference between trying to get rich quick and getting rich slowly. Buy great companies when they’re down and let time work its magic for you. At this time five years ago Home Depot sold for $126 and sported a dividend of 69 cents. Now it’s at $248 with a dividend of $1.65.
Getting rich slowly is the key to a comfortable retirement.
At the time of publication, Dana Blankenhorn owned no shares, directly or indirectly, in companies mentioned in this story.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.