Where Will Home Depot Go Post-Earnings?

With shares of Home Depot (NYSE:HD) trading around $80, 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 posted third-quarter earnings that beat analyst estimates and caused the company to raise its forecast. A boost in the housing market has made consumers confident enough to spend money on remodeling their homes, which led to increased spending at Home Depot, according to Bloomberg. Home Depot’s revenue grew 7.4 percent to $19.5 billion. Net income rose 43 percent to $1.35 billion, up from $947 million a year ago.

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, as it trades near all time highs. 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

19.25%

0%

0%

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

Put IV Skew

Call IV Skew

December Options

Flat

Average

January 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 small 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?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

50.79%

22.77%

22.06%

35.80%

Revenue Growth (Y-O-Y)

7.39%

9.49%

7.40%

13.94%

Earnings Reaction

1.78%*

-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.

* As of this writing

P =Average 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), Lumber Liquidators (NYSE:LL), and sector?

Home Depot

Lowe’s

Orchard Supply Hardware

Lumber Liquidators

Sector

Year-to-Date Return

31.09%

43.41%

-96.60%

118.70%

25.15%

Home Depot has been an average relative performer, year-to-date.

Conclusion

Home Depot is a leading provider of home improvement products and services to consumers and professionals. The company posted third-quarter earnings that beat analyst estimates and caused the company to raise its forecast. The stock has been exploding at an increasing rate over the last couple of years and is currently trading near all time highs. 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 an average year-to-date performer. Look for Home Depot To OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

More from The Cheat Sheet