Home Depot Stock: Panic Is Overblown (NYSE:HD)

The Dwelling Depot, Inc. (NYSE:HD) has considerably outperformed the S&P 500 (SPX) (SP500) (SPY) since our previous update, urging traders to disregard the concern as mortgage charges surged.

As such, we expect it is opportune for us to replace whether or not traders who missed HD’s September lows may nonetheless discover enticing entry ranges to partake in its restoration.

The corporate delivered a robust Q3 earnings launch in November, corroborating the energy of its execution. As such, we assessed that the market had appropriately anticipated its robust efficiency, as most of its current good points had been posted pre-earnings.

Whereas the corporate maintained its FY22 steering, it is noteworthy that it did not improve its outlook. As such, we consider the corporate is probably going anticipating important macro headwinds that would persist by means of 2023, impacting its transaction and, subsequently, its same-store gross sales momentum as shoppers doubtlessly pull again their spending.

Nevertheless, traders can be remiss to suppose that The Dwelling Depot had not thought-about such a risk, regardless that it declined to replace its forecasts for 2023. Notably, CEO Ted Decker articulated that the corporate’s full-year steering had contemplated “fourth quarter comps will be the lowest for the (FY22), albeit optimistic, and (HD) had harder comps from (FQ4’21).”

Therefore, we assessed that the corporate stays assured within the energy of its execution to tide by means of the macroeconomic headwinds that would influence its Professional and DIY enterprise in 2023.

Regardless of that, it is cheap for traders to be cautious after its exceptional restoration from its September lows. Accordingly, HD recovered greater than 30% by means of its December highs, properly above its 10Y whole return CAGR of 20.6%. Therefore, we consider a consolidation section ought to be anticipated, given the uncertainties from a hawkish Fed by means of 2023, as traders parse the influence on shopper discretionary spending and residential enchancment retail.

Hedgeye highlighted in November that the traders may have overstated a possible Fed pivot, worsening the potential draw back dangers to HD’s demand outlook and earnings projections. It accentuated that “home turnover, residence costs, shopper discretionary spending, and lumber costs are all slowing in an alarming development for residence enchancment gamers.”

Hedgeye’s remark is legitimate, as gross sales of current properties have declined for a “record 10th straight month.” As such, it demonstrated that the rise in family formation had moderated markedly, with worries of a “pulled ahead” demand impacting the housing demand outlook additional.

Furthermore, home affordability remains a concern, as housing begins and permits additionally fell in November. Whereas the 30Y mortgage price has pulled again sharply to six.27% (from October highs of seven.08%), it stays traditionally excessive.

However, the vital query traders want to handle is whether or not HD’s September lows have contemplated these challenges because the market seems to be forward.

As seen above, we parsed that HD’s NTM EBITDA fell under its 10Y common at its September lows, regardless that it did not attain the depths seen in March 2020.

We additionally gleaned that analysts have turned more and more pessimistic on The Dwelling Depot’s trade by means of December, as they downgraded their earnings projections given a doable recession.

Therefore, HD bulls may justifiably argue that the market has doubtless factored earnings and execution dangers by means of 2023. Moreover, we additionally mentioned administration’s outlook for FY22 ought to have baked in appreciable weak spot, given the Fed’s hawkish stance. Therefore, we do not suppose the market is so “dumb” to disregard these identified dangers, because it’s forward-looking.

However does HD’s value motion justify a September bottoming?

We gleaned that HD shaped a really delicate bear lure at its September lows, based mostly on its earlier June backside. It barely crossed the road for a double-bottom bullish reversal however nonetheless met the mark, nonetheless.

Nevertheless, its restoration towards its December highs additionally shaped a bull lure, which coincided with November’s CPI launch, aptly rejected by the bears who appropriately anticipated the Fed’s hawkish stance.

Therefore, traders should not be shocked by the exceptional rejection. Nevertheless, the vital query is whether or not HD may revisit its September lows?

We do not suppose so. As mentioned, we’re assured that the market has anticipated important pessimism at its September lows. Coupled with de-risked analysts’ estimates, HD ought to have a neater time clearing the bar in 2023, in step with administration’s extra prudent outlook for FY22.

However word that our thesis is based on a mild-to-moderate recession. Therefore, if Tesla (TSLA) CEO Elon Musk’s prediction of a severe recession had been to happen, then HD’s September lows are unlikely to carry.

As such, traders ought to stay nimble and affected person, ready for significant pullbacks so as to add extra publicity, resulting in improved reward/threat.

Score: Revise from Purchase to Maintain for now.