HD revisited

HD jan 1 2016

For the record, we thought this stock was high enough when it hit $80 two years ago. Once again it looks like this stock is priced to peak performance. Together with MCD, Home Depot was the best DOW stock this year by gaining 26%. Most years before that it did even better. It is not clear why. Home renovations are popular lately but  your local hardware store or lumberyard has gone out of business some time ago and competing companies like Loews and Rona are not anywhere near as successful.

     The secret may be the stock buy-backs. These guys are at the top of their game in this respect. It is a simple procedure, borrow lots of money, buy back your stock and watch your earnings grow. In the past few years they have been at this to the tune of about $40 bln. which is roughly equal to 1/4 of the present, inflated, market cap of this company.

     In the past this kind of a ponzi scheme might have been frowned upon as it might be considered manipulation of the stock or, at the very least, something indicative of a lack of a moral or business compass. Not so today. It is applauded as just another way of catering to shareholders (and, by the way, management). However, the problem is that this cannot continue forever. The count we show in the chart suggest that this is the end of the line. Next logical target is at that same $80 level.

    Please note that this stock did miserably as the housing market in the US rose during the 2000 to 2006 period. The Great Recession seems to have little impact on this stock.