Time to Remodel Your Portfolio With Home Depot Stock

Improving technicals and fundamentals along with a solid dividend make HD a compelling buy

Shares of Home Depot (NYSE:HD) are finally beginning to find some support after a post-earnings pummeling. HD stock shed some 25 points, or over 10%, before finally finding some footing over the past few days. Some of the drop was warranted given a lowered outlook by the company. The selling has now gotten overdone, however. Time to be a buyer of Home Depot stock near current levels.

A lukewarm earnings report was the impetus behind the recent weakness. Home Depot reported on Nov. 19 with revenues coming in shy of analysts expectations. Sales checked in at $27.22 billion compared to expectations of $27.53 billion. The company lowered same stores sales growth to 3.5% from a previous 4%.

Earnings, however, came pretty much in-line at $2.53 versus $2.52 consensus. Home Depot also reaffirmed the earnings outlook. Both the average customer ticket and sales per square foot improved from a year earlier. Overall not great, but not worth a 10% drop in the stock price.

HD Stock Moving Forward

The drop in the stock price combined with no change in earnings means Home Depot stock is looking comparatively attractive on a valuation basis. Price to earnings (P/E) are now under 22 and at a discount to the 5-year average of 23. The P/E ratio for HD is also trading at a discount to the S&P 500 for the first time in the past 10 years. Normally this metric had carried a premium over the last decade.

HD stock is improving from a technical take. MACD is turning higher after reaching the lowest reading over the past year. 9-day RSI is firming up after printing at oversold levels. Bollinger Percent B is back in positive territory after being at the deepest negative levels over the prior 12 months. The detrended price oscillator is similarly looking steadier after a deep drop. Momentum has improved and looks to have bottomed out.

HD stock is trading at a deep discount to the 20-day moving average at $224.21. Previous times that Home Depot stock was at a deep discount led to rallies back towards the 20-day moving average. There is major horizontal support at the $210 area.

The dividend yield now stands at very healthy 2.5%, which is above the 5-year average of 2.1% for HD stock and also above the 1.82% yield of the S&P 500. The dividend payout ratio for Home Depot is well below 60%, which means the dividend is very safe. Income-oriented investors will likely begin to look at HD near current prices. This should help to put a floor in HD stock.

Trading Home Depot Stock

Stock traders should look to be buyers of Home Depot stock on any further weakness. An initial upside price target would be the 20-day moving average level near $224. A meaningful break of the $210 support area can serve as a stop. Selling a March $220 covered call versus the shares would bring in an additional $7 in option premium to further reduce the initial risk while positioning to be a seller on strength.

Option traders may want to position bullishly with a call calendar spread. The January $220/December $220 call calendar is priced at $1.90.  Maximum risk is $190 per spread. Ideally HD closes near the $220 level at December expiration. The trade structure allows for additional selling of weekly call options to further hedge the risk.

Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.