The Worst Mistake Home Depot Investors Can Make Right Now
According to data from Redfin, a real estate brokerage firm, home prices in the U.S. have fallen for five straight months. And a 30-year fixed rate mortgage is currently at 6.6% nationwide, spurred by the Federal Reserve’s aggressive ongoing rate-hiking policy aimed at stopping record inflation. That’s more than double the rate from a year ago.
Still going strong
While a softer housing market might immediately have you thinking of selling shares, the demand for home-improvement projects has remained healthy, and it shows in Home Depot’s latest results. In the most recent fiscal quarter, Home Depot reported that revenue and diluted earnings per share increased 5.6% and 8.2%, respectively.
“To date our customer has proven resilient. We feel confident that we will continue to manage with flexibility through a dynamic environment while growing faster than our market and delivering exceptional shareholder value,” CFO Richard McPhail highlighted on the Q3 2022 earnings call.
While inflation has translated into higher ticket sizes but lower transaction counts, both the DIY and Pro customers are posting gains. This is an extremely positive sign considering how well Home Depot’s business performed in fiscal 2020 and fiscal 2021, in both cases registering double-digit revenue growth.
During the Great Recession, which was brought on thanks to a major housing crisis in the U.S., Home Depot’s sales dropped 7.8% in fiscal 2008 and 7.2% in fiscal 2009. And that was at a time when 25% of homeowners were underwater on their mortgages, and foreclosures were skyrocketing.
Things are not nearly as dire today. Despite U.S. housing prices falling in recent months, the median price of a home is still up 36% from October 2019 to October 2022. That’s a sizable wealth gain for homeowners. Plus 73% of mortgages in the U.S. have a fixed rate below 4%, providing financial safety at a time of rising borrowing costs.
Understanding the state of the economy now, versus where it was in 2008 and 2009, should give shareholders some serious peace of mind. Things aren’t close to as bad for the housing market as they were back then. And in fact, Home Depot is continuing to post growth amid the uncertain macroeconomic backdrop. Wall Street analysts are forecasting sales for fiscal 2022 (ending January 31, 2023) will be 4.2% higher year over year. As you can see, there’s really no reason to panic.
Furthermore, underlying trends in the overall housing market support continued gains for Home Depot. According to the management team, the shortage of housing inventory in the U.S., coupled with the fact that more than half of homes are over 40 years old, provide support for Home Depot’s revenue to keep rising in the years ahead.
Home Depot’s stock is down 25% this year, and it now trades at a compelling price-to-earnings ratio of under 19, which is below the company’s trailing five-year average. Therefore, the worst decision investors can make right now is to sell the stock based on fear of the current macroeconomic picture. This is a business to own in your portfolio for the long haul.
Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot and Redfin. The Motley Fool recommends the following options: short November 2022 $17 calls on Redfin. The Motley Fool has a disclosure policy.