One of the surprise hits in the markets this year is Home Depot (NYSE:HD). Not known for delivering much excitement, early investors were nevertheless rewarded with robust returns. Since January’s opening price, HD stock has gained nearly 38%. Not only that, the home improvement retailer has provided steady passive income along the way.
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Of course, the markets work in cycles. Even the best bullish prospects encounter healthy corrections. Besides, Home Depot stock hasn’t always strung together consistently strong annual performances. And with the company’s fiscal 2020 third-quarter earnings report scheduled for release on Tuesday, Nov. 19, should investors expect an inflection point?
On the surface, it would take a brave soul to bet against HD stock. First, expectations for Q3 are very much in line with reality. Covering analysts hold a consensus target for earnings per share of $2.52. The estimate spectrum ranges from $2.47 to $2.58. In the year-ago quarter, HD forwarded EPS of $2.51, beating consensus of $2.26.
Not only that, the company hasn’t failed to meet EPS expectations since at least Q1 fiscal 2017. Over the last 3.5 years, the worst performance that it delivered was meeting per-share profitability targets in Q2 fiscal 2017.
On the revenue front, analysts expect sales of $27.5 billion. Estimates range from $27.3 billion to $27.8 billion. If the retailer hits its mark, this would represent a 4.6% year-over-year lift. Seasonality wise, this is a very reasonable target.
Thus, I don’t think HD will disappoint on Q3. Unless management says something silly, I believe Home Depot stock has more room for upside.
Favorable Timing Will Benefit HD Stock
A major reason for my confidence in Home Depot stock is timing. The company will report earnings for the three-month period preceding Oct. 31, 2019. Frankly, those months featured positive data for companies involved in the home improvement industry.
First, the S&P CoreLogic Case-Shiller U.S. National Home Price Index has been steadily rising between January of this year till the end of August. To further confirm the rising price of real estate, the average selling price of a home sold in the U.S. increased from $376,700 in Q2 to $380,300 in Q3.
Logically, a robust housing market can benefit HD stock because it’s a seller’s market. Moreover, homeowners have an incentive to renovate their homes to jack up the selling price. Whether it’s money from the homeowner directly or from their contractor, Home Depot is collecting a nice payday.
Second, the Federal Reserve got into the act of helping out Home Depot stock. Perhaps due to pressure from President Donald Trump, the Fed adopted a dovish monetary policy. And the central bank’s financial engineering brought substantive impacts via crazy low interest rates. Since this action correlates with lower mortgage costs, buyers entered the housing market, making it even hotter.
In turn, this likely incentivized more renovation projects, driving up sales for HD stock.
Third, the labor market has been moving in the right direction this year, despite some blips on the radar. For instance, the number of workers unemployed for a period of 27 weeks or longer dropped to 1.25 million people in October. This is a metric that has more or less held steady since April 2018.
While HD stock has recession-resistant qualities, most companies perform better in bull market. Home Depot is no exception.
Current Politics Are Favorable for Home Depot Stock
Although Home Depot’s Q3 featured many positives, one negative weighed on the broader retail industry: the U.S.-China trade war. According to a CNBC report, tariffs had a 2% (or $2 billion) impact on the company’s U.S. sales. Thanks to supply chain adjustments, HD cut the tariff impact down to 1%.
But recently, Trump declared his optimism in getting a substantive deal done with China. Of course, Trump can go back on his words, which he’s certainly done before. However, with a critical election year coming up, he may at least keep up the charade. Thus, Home Depot’s management team has an opportunity to put a positive spin on an otherwise ugly issue.
Overall, then, I believe HD stock is well positioned thanks to what should be a positive Q3 report. If you want to go contrarian to the downside, this isn’t the name you should consider.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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