Beware The Rebound In Home Depot

Home Depot Beats And Raises, But … 

Shares of Home Depot NYSE: HD are up more than 4.0% in premarket trading following what was a better than expected Q1 report. As good as the report is, however, the gains are made on the back of rising prices that are cutting into total volume and the guidance is tepid. In our opinion, what we’re witnessing today in Home Depot price action is a relief rally within a bear market and one that is still well below resistance targets. The key level for Home Depot shares now is near $324 and the 150-day EMA, a level that we see capping gains and keeping price action range-bound at current levels. 

We haven’t seen any analysts' commentary on the stock yet but don’t think these results will change the trend in sentiment. The 23 analysts with current ratings have the stock pegged at a firm Buy but the price target is coming down because all the 2022 commentaries save 1 have been negative. This has the Marketbeat.com consensus price target trending lower and at the lowest levels in 3 months if still 30% above the current price action. And for the institutions? They still hold a little more than 70% of the stock but turned bearish in Q2. The Q2 activity is worth about $9.88 billion with 60% of that total sold or a net 0.65% of the market cap with shares at $295. 

Home Depot Sets Q1 Record 

Home Depot had a good quarter but the details reveal a weakness that we do not think is buyable. The company reported $38.91 billion for a gain of 3.8% over last year and a company record but pricing is the reason why. On a comp basis, system-wide comps are up 2.2% with a 1.7% rise in the US. On a ticket/volume basis the check average is up 11.4% while volume is down 8.2%, on a square foot basis sales are up 2.7%, and trailing YOY inflation gains by nearly 600 basis points. 

Moving down to the earnings, the news is equally mixed. The company reported margin contraction at both the gross and operating levels of 20 basis points but it was more than expected and cut into the bottom line. In regards to net earnings, net earnings rose a mere 2.1% compared to the 3.8% in revenue growth which offsets the apparent strength in EPS. The GAAP EPS came in at $4.09 and beat by $0.39 but this was aided by share repurchases. 

Turning to the guidance, the guidance is just as mixed as the rest of the report and leaves us no reason to think shares are undervalued or that growth is not already priced in. The company raised its guidance for revenue to about 3.0% which is less than 100 basis points above the consensus figure and EPS growth isn’t going to be much better. If inflation continues to cut into volume sales as we suspect it might, this guidance could be overly optimistic. 

The Technical Outlook: Home Depot Is In A Relief Rally 

Shares of Home Depot are moving higher in early premarket action but we aren’t buying into the move just yet. While the near-term outlook is positive, there are significant converges with recent price action that leads us to believe the lows near $280 will be retested. Not only that, the current bear peak in MACD is an extreme peak and bigger than the pandemic peak set in 2020 so we view it as very strong. In this scenario, a test of support near $280 carries the risk of lower lows and, if set, a much deeper correction than what we’ve already seen. At best, we are expecting to see HD move up to test resistance at $324 and then move sideways. At worst, the pop in prices will be met by profit takers and speculators who drive HD down to a new low.