Home Depot (HD) is up nearly 10 percent in 2013, and is trading at levels not seen since 1999. On March 8 of this year, the stock closed at an all-time high of $71.37 and has not traded below $68.42 since.
RIDE THE RECOVERY WAVE
With the United States at the beginning of what according to many will be a protracted recovery in the housing market, home improvement warehouses like Home Depot and Lowe’s (LOW) are poised to reap the benefits.
A slew of recent economic data should convince even the most bearish skeptics that the housing recovery is underway and rapidly picking up steam. New residential construction, measured by building permit issuances, increased by 4.6% from January to February (904,000 to 946,000) this year, up 33.8% from February 2012.
THE NUMBERS
According to data from the National Association of Realtors, existing home sales have risen to their highest levels in over three years. The Standard & Poor’s Case-Schiller home-price indexes showed year-over-year price gains in excess of eight percent – the highest annual gain since 2006. Finally, foreclosures initiated in the fourth quarter of 2012 have fallen to their lowest levels since officials began measuring them during the financial crisis.
LOOK AT SALES
While housing starts are perceived as the important indicator for companies like Home Depot, existing home sales are equally telling. Prior to listing their homes on the market, homeowners will perform minor renovations with the hope of fetching a higher sale price. Homebuyers usually make several purchases to upgrade or outfit a newly purchased residence, while property flippers tend to rehab properties prior to passing them on.
TOP PICK
With a $103.5 billion market cap and P/E ratio of 23.2, Home Depot is widely regarded as the best of breed of the home improvement retail sector. Analysts are forecasting shares to continue to climb above the near 40% gain of the past year, citing HD’s solid earnings track record and history of revenue growth.
Home Depot is scheduled to report earnings next on May 21. Hedge fund holdings include Ken Fisher’s Fisher Asset Management’s $500M stake and Patrick McCormack’s Tiger Consumer Management, who recently increased their stake by 29% to $119.4M (source: www.insidermonkey.com).
HD shares closed the day Monday at $69.67.
MY TRADE
Buy the May HD 72.5 Calls for $0.54
Risk: $54 per 1 lot
Reward: theoretically unlimited
Breakeven: $73.04
