Can Home Depot Continue Its Uptrend?

With shares of Home Depot (NYSE:HD) trading around $72, 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 reported earnings that beat analyst expectations on Tuesday morning, leading the home-improvement retail chain to raise its full-year expectations. The company cited the rebounding housing market as a reason for the growth. In May, home prices rose and Home Depot reported it was getting more professional customers than individual homeowners for the first time since the economic downturn. Earnings per share came in at $1.24, beating the average forecast of $1.21, and sales grew 9.5 percent to $22.5 billion.

T = Technicals on the Stock Chart Are Mixed

Home Depot stock has been exploding to the upside over the last couple of years. Investors in the stock have been booking gains as the stocks pull back from 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 between its key averages, which signal neutral 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

22.87%

43%

41%

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

Put IV Skew

Call IV Skew

October Options

Steep

Average

November Options

Steep

Average

As of today, there is an 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 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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

22.77%

22.06%

35.80%

5.00%

Revenue Growth (Y-O-Y)

9.49%

7.40%

13.94%

4.64%

Earnings Reaction

-1.22%

2.54%

5.69%

3.62%

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 = 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

17.54%

28.38%

-94.50%

88.47%

16.32%

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. A recent earnings announcement has investors expecting a little more from the company. The stock has been exploding at an increasing rate over the last couple of years but it is now pulling back from all-time high prices. 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. WAIT AND SEE what Home Depot does this coming quarter.

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.