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Why Home Depot Is Your Best Housing Stock

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.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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