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Every Investor Should Worry About What’s Happening To Home Depot Right Now

Every Investor Should Worry About What’s Happening To Home Depot Right Now

HD has surged 600% since 2008, but the market darling is down 14% this year and is in for further declines – which is bad news for all investors, whether they own the stock or not. And this is why.

It may not be a Facebook or a Netflix, or have gotten as much attention as any of the FAANG stocks, but Home Depot (NYSE: HD) has been one of the most reliable growth stories on Wall Street in the last 10 years.

Since 2008, HD has exploded nearly 600%. Compare that to the S&P 500’s 110% in the same 10-year time period.

And it’s no wonder. Revenue has consistently increased—from $71 billion in 2008 to about $100 billion this fiscal year—and it’s dividend has skyrocketed from $0.90 ten years ago to the $4.12 per share expected in 2018.

That’s particularly impressive considering that since 2008, the big box retailer has been confronted with both the fallout of the housing crisis and the rise of e-commerce that has battered other traditional retailers.

Recently, however, HD has been showing some signs of trouble. Trouble that increasingly looks like bad news for the consumer sector in general.

The most obvious sign of trouble? HD’s decline of 14% since the end of January.

HD’s decline could be dismissed as just a victim of last month’s uptick in volatility, but there’s more to it than that.

For one, HD’s recent tumble has come despite strong company earnings with reported net income of $1.78 billion, or $1.52 per share, and with strong forward guidance. And revenue grew by 7.5% to $23.9 billion, beating analysts’ estimates.

So with a report like that, investors waiting out last month’s volatility must have eagerly jumped back into the stock once the dust settled, right? Except they didn’t. Here’s why.

There were some great headline numbers in HD’s earnings report, however, the company also saw a contraction in its profit margins. Not only that, but HD has a fairly high price-to-earnings ratio at 18 – compare that to Lowe’s forward P/E of just 14.

And then there’s the chart with its steep decline since its January high, and steady drop in volume at the same time.

Source: TradersPro.

All of this indicates—at the very least—that HD shareholders are in for another rough few weeks. But there are also some broader trends at work that all investors should pay attention to – stocks don’t react absent of bigger market trends, after all.

Retail sales have fallen for three months in a row. That’s not great news by itself, but it’s even more troubling when you consider that consumer confidence is sky-high and the Republican’s tax reform efforts are already hitting consumers’ bank accounts. So people have the confidence and the money to spend, but they aren’t spending on retail.

Speaking of tax reform, Home Depot is the poster child for companies benefitting from the tax overhaul as most of their operations exist in the U.S. The company’s prior effective tax rate was around 36%, and is down to just 26% for 2018, and you’d think that would boost the stock for a while.

But while tax reform did fuel a 25% surge in HD’s stock price, that momentum only ran from mid-November to the end of January.

And now there are growing signs that the U.S. housing market could be about to roll over. Home prices have been strong and surged 8.8% in February—the greatest gain in 4 years—

but that’s because inventory is becoming increasingly scarce. In fact, the number of previously-owned homes on the market dropped 11% by the end of 2017 to just 1.78 million homes nationwide. That isn’t good news for HD as its business caters largely to DIY fixer-uppers. But it’s also bad news for housing in general as existing homes account for 9 out of every 10 transactions.

The news isn’t good for builders either. Housing stocks as a whole have had a tough go of it lately as fears have risen of an overheating housing market and that interest rates will drive up costs and drive down demand. D.R. Horton (NYSE: DHI) is down nearly 17% this year, while NVR Inc. (NYSE: NVR) is down 18%.

So despite sky-high consumer confidence and the boost of the tax cut, the whole housing market seems to have hit a wall. For HD, its most recent earnings report featured growth and a 10-year history of outperformance, but still, investors are abandoning the stock and won’t be coming back any time soon.

That’s bad news for Home Depot, and if the trends in the broader housing market are impacting this big-name stock, it’s worth considering if these headwinds will weigh on other consumer-related sectors in the near-term.

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