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Real Time Insight

With a housing recovery well underway, many are looking for equity plays on this important trend. While homebuilders were once a popular destination, investors have branched out into the construction product and retail segments for tangential exposure to this positive situation.

That is because, with housing prices back on track in some markets, some homeowners are finally looking at trading up or moving out of their current residences. This creates a huge demand for new home furnishings, appliances, and general construction materials in order to make sure that everything is in top shape for potential buyers.

While there are a number of companies that fit this bill, arguably one of the biggest is Home Depot (HD - Analyst Report). The retail giant is home to many of the aforementioned listed products, and thus could be a big beneficiary of the trend.

However, some are starting to worry about housing once more, thanks to a recent flurry of so-so data. It also hasn’t helped that the stock market has been weak these last few days, suggesting to some that a focus on more defensive plays could be the way to go in the near term.

But what do you think about Home Depot?

Does this massive retailer have room to run thanks to a stronger housing market, or will a spring swoon push this company into bear territory?

Reasons to Buy:

  • Although HD only has a Rank of 3, it is in solid company from an Industry Rank perspective. At time of writing, it was in the top 25% for this metric.
  • The company also has a positive ESP, suggesting that estimates have been moving higher for this quarter and that a beat might be in the cards.
  • HD also has a good history of beats when it comes to earnings season. It has met or beat estimates in every one of the last four quarters, and it hasn’t missed overall in more than five years.

Reasons to Sell:

  • Is the housing market really that strong? Data such as the recent housing market index suggest that it might not be, which may not be good news for companies like HD.
  • HD is a bit pricey on a P/E basis, as this important ratio is over 20. Obviously, this isn’t that extreme, but this represents a P/E greater than what investors saw in the height of the housing bubble years of 2005-2007.
  • Other metrics, such as P/B, P/S, and P/CF are all above multi-year averages for the company as well. Add this in to recent weakness in consumer sentiment and jobless claims, and it is certainly possible that many are just too confident over HD’s prospects in the near term.  

Which story wins out for you; the strong history of HD repeating itself in the months ahead, or a lackluster economic environment pushing this potentially overvalued retailer back to Earth?

Let us know in the comments section below!

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