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Very recently, there have been signs of fracture in the Home Depot stock prices. In addition, it looks like the situation is ging to actually get worse for the retailer.
Here’s the thing, even as the FAANG stocks have gotten a lot of attention over the past few years, Home Dept was actually one of the most reliable growth stories on Wall Street.
Since 2008, shares of Home Depot (HD) have surged almost 600% compared with about 110% for the broader S&P 500 (SPX) in the same 10-year period. That was for good reason, as revenue consistently marched higher, from about $71 billion in 2008 to roughly $100 billion this fiscal year, and its annual dividend soared from just 90 cents a decade ago to an expected $4.12 per share in 2018.
This performance is noteworthy for any company, but particularly for a store that had to deal with both the fallout of a housing crash as well as the pressures of e-commerce.
Here’s why Home Depot may be in store for further declines — and why all investors should pay attention, whether they own this stock or not.
What’s behind Home Depot’s recent declines?
The most obvious sign of trouble at Home Depot is the stock’s recent decline of about 13% from all-time highs in January. It’s easy to write some of that off as simply the stock falling victim to market volatility in February, but it’s more complex than that.
For starters, these declines came even as Home Depot earnings were quite strong, featuring a beat on both the top and the bottom line along with strong forward guidance. With a report like that, if investors were really just caught up in short-term market trends they would have eagerly come back as buyers when the dust settled.
But they didn’t.
There’s a host of reasons for that, but a few to consider include:
• Margins under pressure: While the headline numbers were encouraging, Home Depot saw a contraction in its profit margins.
• Valuation: Even after the drop, this home-improvement retailer still has a fairly rich price-to-earnings ratio that’s just shy of 18. Other big box stores are significantly lower; top competitor Lowe’s (LOW) has a forward P/E of just 14.
• Ugly charts: With a steep drop in share price from the January high coupled with a steady drop in volume, the momentum seems to point more to the downside rather than to a floor.
These signs point at the very least to another rough few weeks ahead for Home Depot shareholders. But as I said previously, there are also some worrisome big-picture trends at work that all investors should take notice of.
Read more about this Home Depot story here.