Is Home Depot’s Stock a Buy Now?

With shares of Home Depot (NYSE:HD) trading around $76, 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 announced Wednesday that it has started to fill more than 80,000 positions as it preps for spring, its busiest season of the year. The company says it plans to fill 540 positions in Fort Myers. ”Spring is our peak hiring season, giving us the opportunity to find some of the best associates who are passionate about customer service,” said Tim Crow, executive vice president of human resources, in a press release. Those wishing to apply for an open position with the home improvement retailer can find a list of openings and apply online at careers.homedepot.com. Home Depot said availability varies from store to store in various regions based on need, but it encourages college students, retirees, veterans, and reservists to apply.

T = Technicals on the Stock Chart Are Mixed

Home Depot stock has been exploding to the upside over the last couple of years. The stock is currently surging higher and looks poised to continue. 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 below its rising key averages, which signals neutral to bearish 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

21.62%

73%

71%

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

March Options

Steep

Average

April Options

Steep

Average

As of Wednesday, there is average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish 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 bearish 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?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

50.79%

22.77%

22.06%

35.8%

Revenue Growth (Y-O-Y)

7.39%

9.49%

7.4%

13.94%

Earnings Reaction

0.89%

-1.22%

2.54%

5.69%

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), Orchard Supply Hardware (NASDAQ:OSHWQ), and Lumber Liquidators (NYSE:LL) — and sector?

Home Depot

Lowe’s

Orchard Supply Hardware

Lumber Liquidators

Sector

Year-to-Date Return

-6.83%

-5.81%

-32.3%

-7.57%

-5.73%

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 announced Wednesday that it has started to fill more than 80,000 positions as it preps for spring. 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, investors have been pleased with the company, as 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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