In this installment of Using The Value Line Report, we will be taking another look at household products retailer Home Depot, Inc. (HD Free Home Depot Stock Report). More specifically, we will analyze what has caused the stock to lose some steam over the past few months. In addition, we will examine its prospects over the next 3 to 5 years to determine whether the equity can regain the impressive form that drove HD’s share price to record highs over the past few years. The Value Line report offers a wealth of data that can prove to be an essential resource for a broad spectrum of investment styles. In this review, we will examine a technical, as well as a fundamental, approach to considering Home Depot’s shares.

The two highly contrasted techniques are often polarized by their respective conceptual perspectives on investing; the Value Line page provides qualitative, quantitative, and technical information that enables the investor to consider some of the more vital aspects of both styles. Indeed, Home Depot has various characteristics that could well appeal to both the trend-oriented momentum investor, as well as those seeking a more stable and predictable instrument for long-term capital gains.

The best means by which to analyze the pertinent data for determining a trend is by using the price chart in the Graph, and the historical “Highs and Lows” that are listed directly above the Graph. In addition to these metrics, one can also establish a trend based on the Relative Price Strength, which comparesUsing the VL Page_Graph the stock’s price performance versus the Value Line universe. This data is also found in the Graph. All of these metrics support the argument for momentum, as the stock has charted impressively over the past four years, generally remaining ahead of its 200-day moving averages (with some brief exceptions). However, from a purely technical standpoint, one could argue that a correction is overdue. This is why the Value Line Timeliness ranking system (found in the Ranks box) takes into account the 10-year trend of relative earnings and prices, as well as earnings surprises. That said, Home Depot’s rank has been slipping. It went from 1 (Highest) in the fiscal first quarter of 2016 (began February 1st), to 3 (Average) as of June 24th.  This suggests that the equity’s price performance is likely to mirror the averages of the other 1,700 stocks in the Value Line Investment Survey over the next six to 12 months.

Using the VL Page_Timeliness Ranks BoxIt is well known that attempting to time market trends can be an investing method that is wrought with risk. Although there are credible arguments for both the pitfalls and merits of trend analysis, there are some companies that offer strong growth potential, even though they may not appear particularly sound financially or the operational outlook is questionable. Still, trend analysis is a technical approach that emphasizes historical price movement as a strong indicator of future performance. This strategy of buying into a trend can be highly lucrative, but the key is to know how to predict a reversal and decide when to sell or short that equity before the market moves against you. This method is a more momentum-based approach to investing.

As we previously mentioned, a quick look at the Graph again, reveals that Home Depot has been on an exciting upswing for over four years. Indeed, the stock doubled over the course of about 18 months from early 2012 to mid-2013. The stock slowed a bit in the second half of 2013 only to gear up for another strong run from mid-2014 to its all-time peak of $139 just this past August. On the other hand, however, as we mentioned before, despite the milestone achieved just a few weeks ago, HD’s price performance has been somewhat tempered over the past few months, despite strong year-over-year revenue and earnings growth displayed in the Quarterly Earnings box on the lower left-hand side of the page. Although the June report did not reflect the most recent earnings release (because the company had not reported by the time our review went to press), the company reported GAAP sales of $26.5 billion and share net of $1.97 for the July quarter, which were in line with analyst Matthew E. Spencer’s estimates for that period. To wit, the ongoing operational results support continued share-price gains at least in the near term.   

Still, investors looking to employ a more long-term approach would likely find fundamental analysis to be a more reliable methodology. This technique emphasizes intrinsic value based on various qualitative and quantitative factors, including macroeconomics, financial condition, and management style. This Using the VL Page_Quarterly EPS Boxprocess is expected to give the investor an idea of the company’s current worth, the nature of its industry, and earnings predictability. This allows one to weigh these factors against the equity’s market price and determine how to invest accordingly.

From a fundamental perspective, there is an abundance of data that speaks to the financial health of the company, as well as its revenue and earnings growth potential over the next 3 to 5 years. A look at the Statistical Array offers insight into Home Depot’s past performance, based on actual data from the Using the VL Page_Historical Arrayincome statement and the balance sheet, as well as some key quantitative ratios, including Return on Total Capital and Return on Shareholder’s Equity. These metrics help us to see that, through a combination of profit growth, share buybacks (reduction in the number of shares outstanding), and effectively managing its debt, the company has been increasing its share earnings, Return on Total Capital, and Return on Shareholder’s equity for several years. Moreover, shifting over to the Annual Rates box, it becomes evident that Home Depot has a strong record of earnings, cash flow, and dividend growth rates over the past 5 years. Too, according to Mr. Spencer’s projections over the pull to late decade, the company’s growth rates over that span are promising, as well.

However, based on the 3- to 5-year Projections, which resides directly below the Ranks box, the Target Price Range indicates that the equity offers limited total return potential out to 2018-2020, from the current quotation.

Using the VL Page_Projections BoxNonetheless, we believe that Home Depot is a sound investment choice, overall. In particular, conservative investors seeking exposure to the retail building supply industry, with some solid income to boot (dividend yield is 2.0%), should find HD’s Safety rank of 1 (Highest) very encouraging. All told, this is a solid holding for any well-balanced portfolio.     

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.