Is Home Depot Enticing Post-Earnings?

With shares of Home Depot (NYSE:HD) trading around $78, is HD an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Home Depot is a home improvement retailer that operates Home Depot stores, which are full-service, warehouse-style stores. The company sells an assortment of building materials, home improvement, lawn, and garden products, and provides a number of services. Home Depot stores serve three primary customer groups: do-it-yourself customers, do-it-for-me customers, and professional customers. Construction and improvement of new and existing homes and businesses is on the rise, as consumers and business owners are investing where they operate. Look for the home and business improvement trend to continue and for Home Depot to be a leading provider of the products and services consumers and professionals demand.

Home Depot on Tuesday reported first-quarter of fiscal 2014 net earnings of $1.4 billion, or $1 per diluted share, compared with net earnings of $1.2 billion, or 83 cents per diluted share, in the same period of fiscal 2013. For the first quarter of fiscal 2014, diluted earnings per share increased 20.5 percent from the same period in the prior year. First-quarter fiscal 2014 results reflect a benefit to earnings, net of tax, of $61 million, or 4 cents per diluted share, related to the sale of a portion of the company’s equity ownership in HD Supply Holdings Inc. Total sales for the first quarter of fiscal 2014 were $19.7 billion, a 2.9 percent increase from the first quarter of fiscal 2013. Comparable store sales for the first quarter of fiscal 2014 were positive 2.6 percent, and comp sales for the U.S. stores were positive 3.3 percent.

T = Technicals on the Stock Chart Are Strong

Home Depot stock has been exploding to the upside over the last couple of years. The stock is currently surging higher and looks set to continue this path. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Home Depot is trading between its rising key averages, which signals neutral price action in the near-term.

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Home Depot options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Home Depot options

16.34%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Average

Average

July Options

Average

Average

As of Tuesday, there is average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Home Depot’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Home Depot look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

20.48%

6.4%

50.79%

22.77%

Revenue Growth (Y-O-Y)

12.48%

-3.01%

7.39%

9.49%

Earnings Reaction

2.54%*

4%

0.89%

-1.22%

* As of this writin.

Home Depot has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Home Depot’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Home Depot stock done relative to its peers – Lowe’s (NYSE:LOW), Builders FirstSource (NASDAQ:BLDR), and Lumber Liquidators (NYSE:LL) — and sector?

Home Depot

Lowe’s

Builders FirstSource

Lumber Liquidators

Sector

Year-to-Date Return

-4.58%

-7.71%

-0.84%

-21.8%

-7.73%

Home Depot has been a relative performance leader, year-to-date.

Conclusion

Home Depot is a leading provider of home improvement products and services to consumers and professionals. The company reported first-quarter earnings on Tuesday that pleased investors. The stock has been exploding at an increasing rate over the last couple of years and is currently surging higher. Over the last four quarters, earnings and revenue figures have generally been rising. Relative to its peers and sector, Home Depot has been a relative year-to-date performance leader. Look for Home Depot to OUTPERFORM.

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