No welcome mat for Home Depot
Published: October 22, 2010
Time posted: 6:08 am
Dear Mr. Berko: Way back in 2003, you recommended Home Depot, and I bought the stock at $21 and sold it just when Robert Nardelli left in 2007 at $40.
Now I’m thinking of buying 300 Home Depot because revenues and earnings are improving, new stores are being opened and the company has strong finances.
So with the economy just beginning to recover and employment beginning to pick up, I think this may be a good time to go back into the stock. Please give me your take on the stock now. – L.P., Wilmington, N.C.
Dear L.P.: Between l998 and 2001, Home Depot (HD, 52-week high of $37.03 as of April 26) traded in the megasphere with a price-to-earnings ratio in the mid 40s and a share price ranging in the $50s, $60s and $70s.
You received brilliant and timely advice on your purchase of those 300 shares at $21 in 2003. But remember: You bought those shares for the following reasons:
1. Everyone and their step cousin was building homes, buying homes, renovating homes and selling homes.
2. Many homeowners were borrowing money from their banks to add a new bath, kitchen, family room, etc., to their current homes.
3. Commercial construction was booming; numerous small, five-to-eight-tenant shopping plazas were being built wherever zoning was permitted.
4. Financing was a cinch. Banks were lending 110 percent of the purchase price, and, at some banks, a beagle could borrow $300,000 using its dog tag ID as a Social Security number.
5. Plumbing manufacturers and companies making windows, carpets, shingles, lawn equipment, hand tools, cement, tile, etc., were enjoying record revenues and prosperity.
6. Mortgage brokers, real estate brokers and appraisers falsified applications and used fuzzy numbers.
7. Builders paid attractive incentives under the hat to mortgage and real estate brokers and appraisers.
8. Employment was 96 percent, personal earnings were setting record highs, consumer confidence was strong and the real estate market was on steroids as well as speed.
9. There was gold dust in the air. You could feel it because it was palpable.
And as soon as Robert “Nasty” Nardelli became CEO in January 2001, the shares came crashing down from $70 and were trading at $26 when the board recommended his departure in 2007. And since Nasty’s departure, HD’s revenues crashed from $90 billion to perhaps $68.6 billion this year, but the store count grew by 105 stores to 2,250.
And, yes, earnings have improved some, as have gross margins and cash flow, and future earnings will likely be supported by a very gradual improvement in the labor and housing market. However, I doubt that HD will be the juggernaut it used to be, and I think that future appreciation potential will be below average.
Because none of the positives that encouraged you to buy HD in 2003 and the hubris that existed at that time are no longer present, these shares don’t light my pipe. And because the economic recovery will be a lot slower than the administration is willing to admit, I’m certain that enthusiasm for HD will be short-lived.
However, if you really, really want to own the stock, consider placing an open order to purchase the shares at the $26 level. If the market has a temporary sell-off, you might be able to own the stock close to its prior lows of 2009.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at firstname.lastname@example.org.