Can Home Depot Support These All-Time Highs?

With shares of Home Depot (NYSE:HD) trading around $74, 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 with stores located throughout the United States as well as Puerto Rico, Virgin Islands, Guam, Canada, China and Mexico. The company operates the Home Depot stores, which are full-service, warehouse-style stores. These stores sell an assortment of building materials, home improvement and lawn and garden products and provide a number of services. Home Depot serves three primary customer groups: do-it-yourself (D-I-Y) customers, do-it-for-me (D-I-F-M) customers and professional customers. Home improvement has seen a rise in recent years so companies like Home Depot stand to see excellent growth opportunities.

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T = Technicals on the Stock Chart are Strong

Home Depot stock has been part of a wide range for most of the last decade. In recent times, Home Depot stock surged higher which has taken it now to all-time high prices. 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 above its rising key averages which signal neutral to bullish price action in the near-term.

HD

(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

19.83%

83%

79%

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

Put IV Skew

Call IV Skew

May Options

Flat

Average

June Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish 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?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

33.33%

5%

17.44%

36%

Revenue Growth (Y-O-Y)

13.99%

4.62%

1.68%

5.89%

Earnings Reaction

5.69%

3.62%

3.57%

-2.42%

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

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P = Excellent Relative Performance Versus Peers and Sector

How has Home Depot stock done relative to its peers, Lowe’s (NYSE:LOW), Orchard Supply Hardware (NASDAQ:OSH), Lumber Liquidators (NYSE:LL), and sector?

Home Depot

Lowe’s

Orchard Supply Hardware

Lumber Liquidators

Sector

Year-to-Date Return

19.30%

7.85%

-78.14%

28.58%

12.80%

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

Conclusion

Home Depot provides products and services to a growing home improvement niche to consumers and businesses in many countries. The stock has been an excellent performer in recent years on support by consistently increasing earnings and revenue figures. Relative to its peers and sector, Home Depot has been a relative performance leader, year-to-date. Look for Home Depot to continue to OUTPERFORM.

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