Home Depot (HD)

The home improvers thrived during the pandemic, then the consumer pivoted to services. Now, this has normalized and as interest rates declined, hone projects will pick up. These type of retailers tend to improve before 1-2 quarters before the Fed cuts then keep doing well. HD has done helpful acquisitions and it focuses on their pro customers. Two tailwinds. It pays a 2.5% dividend, which they never cut.

Wasn't a great quarter, but gross margins beat though the topline was soft. We've seen a bottom, so it's time to get it.

Leg into this slowly. Expect a few more challenging quarters, while their PE is a little high. Even rate cuts won't trigger a bounce in the housing market. In the US, the mortgage rate has fallen from 7% to 6.5%, but the 30-year mortgage is under 4%. A better leading indicator is the price of lumber.

It trades at a stretched 23x PE, but easy same-store comps are coming, profits are amazing, a recent buy is synergistic, and self-help is increasing market share.

Interest rates are dropping but the US consumer is weakening, conflicting trends. This and Lowe's have done okay in recent weeks only because rates are starting to drop and this won't return them to glory days. Wait and see if there's a recession around the corner, then maybe buy them as an early-cycle stock. He likes the homebuilders though.

He'll buy more given share buy backs and strong dividend growth. Was up 11% in Q2. Will benefit if interest rates decline.

High quality. With high interest rates, seeing weakness in terms of large projects. But things are starting to normalize. Looking ahead a year from now, interest rates will probably start trending down and historically low housing starts should improve. Recent acquisition of SRS diversifies its offerings.

Long-term trend is still positive. Over half US housing stock is over 40 years old, so if interest rates make it too costly to move, you have to do some repairs. Still lots of 18-35 year olds living at home, and they need to move to their own places. Immigration is positive as well. Attractive yield of 2.62%.

One of his two choices in the space. Prefers the providers of building supplies rather than homebuilders themselves.

Owned HD 25 years ago. Took profits 10-12 years ago, and switched to LOW. Based on LOW successfully adopting the HD playbook to grow gross margins, and on valuation (LOW was 4 multiple points lower than HD). HD is now trading at a low 20s multiple, and LOW is about 17x. 

Out of both right now. He became skittish on consumer. It's not they've been poor performers, but the new choices have rewarded clients to a better extent.

Great companies, great franchises. Always looking for an entry point, it's not yet. HD reported this morning, shy on revenue, mentioned consumer pulling back. He wouldn't be surprised to be in one or the other in the not-too-distant future.

Pays a 2.6% dividend and boasts $18 billion free cash flow.

Shares down 16-17%, near 200-day MA, opportunity. Very strong brand reputation, dominant market position. Very consistent revenue growth. Short term, still sees pretty stable US housing market, consumer confidence remains stable. US labour market remains steady, with low unemployment. Interest rates will be lower at some point. Yield is 2.7%, very consistent dividend increases.

Homes are aging, shortage in home inventory, home prices still going higher. Very resilient during downturns, home maintenance needs continue regardless of what's going on.

It is at a more reasonable valuation and is dominant in the home renovation market in the U.S. Don't sell for tax reasons.
The question was also about selling stocks before June 24 to avoid the increase in capital gains. His advice is not to put your stocks on fire-sale to avoid the new capital rules which come into effect on June 24.

Generally, retail is a tough industry. Wary of retail that's not specialty. Look at HD and ORLY, which are specialty retail, but wait for a pullback.

HD is currently trading at 21.8x Forward P/E, historical averages range from 18x-25x. The recent announcement of the acquisition of SRS distribution, which was a large transaction for HD of around $18B, may continue to put the share price under pressure for quite some time until the earnings get consolidated and the acquisition is proven out. In addition, the recent uncertainty around rates and the housing market also put HD's shares at a more attractive level. We would consider HD's current price to be an okay entry point, and we would be fine buying, but not too aggressively. We would instead prefer to average into the position over time if prices drop further.
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