This is a stock I would sell, assuming of course that I was fortunate enough to have owned it and, and this is very important, not stupid enough to have sold it at a much lower level.
It has a well formed channel, a wave count that is clearly 5 waves even if they are not exactly the ones shown, and we are at the top of the chart! A drop to about $100 is easily within the possibilities so the risk/reward ratio is running against this stock.
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.
Home Depot is big on DIY projects. Back in June 20, 2007 the company decided to buy-back 22.5 bln. of it’s own stock. The stock was trading at about $40 at the time and the buy-back represented about 1/3 of the total float. This time the company promises to buy-back 17 bln. which is about 12/13% of the present float. This is at a time that the company is doing quite well thanks in part to hurricane Sandy. Nowadays markets always applaud buy-backs as a sort of tax-free dividend. There are still places in the world where the practice is illegal and certainly in all cases one would have to wonder how dim a view management has on the company’s prospects to reduce the availability of capital. Perhaps borrowed money is now cheaper than equity and this behaviour is warranted, but that still leaves the timing. On that score this DIY economic tinkering is the writing on the wall.
We commented on this stock back in June of last year. The purple line indicates our expectations then. Initially it did as expected by dropping to about $19 (see that blog) but then it shoots to the moon and, of course, that was not our expectation. There are a number of good (?) reasons why this might have happened. An obvious one, at least in today’s reverse thinking, was that the housing market was so bad that people stayed at home and renovated instead. Others thought that the quality of management had led to greater efficiencies and that Lowes had regained its position ahead of Home Depot. A quick look at the HD chart does not support that view, as HD may even have done relatively a little better (see chart below).
In our view much of the vertical increase in these stocks is entirely due to the Fed’s actions, in this case QE2 that started in Oct. The Fed’s action more often than not increase the volatility in the market, ultimately to no one’s benefit. We would get out of both these stocks rather than hope that QE3 will have a similar impact once again.