Home Depot (NYSE:HD) is rallying strongly today with a 5% pop midday on strong earnings and a buyback plan. And despite a rough day yesterday for builders like Toll Brothers (NYSE:TOL) and PulteGroup (NYSE:PHM), the entire housing sector is on the rise with HD stock.
But don’t confuse Home Depot stock with other trades in the space. This home-improvement giant could see continued outperformance in the months ahead as other stocks fade away.
I have been calling a top in homebuilders for a while after a red-hot run in 2012, and we’ve seen a big-time fade recently. The broad-based SPDR Homebuilders (NYSE:XHB) has lost 6% in the past month, while Pulte, Toll Brothers and Ryland Group (NYSE:RYL) are all off by double digits.
Meanwhile, Home Depot has hung in there with only a slight loss in the past 30 days. Furthermore, it has outperformed the S&P 500 since Jan. 1 with a nearly 9% gain year-to-date vs. a roughly 4% rise for the major stock index.
Why? Because its fundamentals continue to blow the doors off. HD’s latest earnings mark the 12th consecutive quarter of year-over-year EPS growth, and year-over-year revenue growth in 11 out of the last 12 quarters.
That dates back to 2010, when talk of a housing recovery got you laughed out of the room.
The latest quarter shows just how powerful Home Depot can be with a tailwind. The retailer reported fourth-quarter profits that topped Wall Street analysts’ expectations with a 29% jump in earnings. Even more impressive is the top-line growth in an era when most companies are squeezing out profits from stagnant sales. Home Depot added more than $2 billion in sales this quarter for a 14% jump in revenue.
Couple that with a big buyback plan totaling $17 billion through fiscal 2015 and continued strength in real estate after good Case-Shiller numbers for December and there’s a compelling long-term case to be made for Home Depot stock.
Why would you buy any other housing stock? The builders have overheated and top competitor Lowe’s (NYSE:LOW) continues to struggle as it streamlines operations.
Home Depot is your best housing stock, hands down.
Of course, after a 43% run in the past 12 months and shares near a 52-week high, there are risks you may be buying a top in HD stock. The valuation multiple is high, with a forward price-to-earnings ratio of almost 20 based on fiscal 2014 earnings forecasts of $3.43 a share. Lowe’s has a forward P/E around 17.5, and some of the homebuilders like DR Horton (NYSE:DHI) and Pulte are even lower despite a meteoric run over the past year.
But even with some of the growth priced in, the argument for HD is compelling — especially when you throw in the dividend. While the 1.7% dividend yield is less than U.S. Treasuries right now, Home Depot hasn’t lifted its payouts since late 2011 and is due for a dividend hike. Furthermore, 10 years ago HD was only paying 6 cents a share each quarter and now is paying almost five times that! That’s a strong history of returning cash to shareholders via bigger dividends.
It all adds up to a pretty good case for Home Depot — especially if the market continues to see headwinds and lets you enter at a good price.
- And in general, housing data seems to be lifting the market today, too. (MarketWatch)
- Are Lowe’s’ best days behind it? (Barron’s)
- Of course, keep some perspective: Pre-crisis growth is a long way off for the housing market. (Forbes)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.