Home Depot Could Shed Another 17% Before Hitting Bottom

A Bleak Technical Picture For Home Depot 

Home Depot NYSE: HD reported another record quarter and year and yet the stock is falling in the wake of the news. The reason is that Q4 results and guidance for 2022 indicate the COVID-19 inspired tailwinds have ceased to blow and growth will be hard to come by. And that is with the addition of higher prices and a reasonably strong housing and remodeling market. The takeaway here is not that Home Depot is in bad shape, only that the results are priced in and now the market is taking profits. Shares of Home Depot were up more than 180% from the pandemic bottom and are still up more than 100% and ripe for a little selling. The worst news we can give is that it looks like another 17% drop is on the way, the good news is that it will become a buying opportunity for those with the patience and fortitude to wait. 

Home Depot Beats On Top And Bottom Line

Home Depot beat on the top and bottom line with revenue of $35.72 billion and adjusted earnings of $3.21. The revenue is up 10.7% from last year and beat the Marketbeat.com consensus by 250 basis points while the EPS grew at a stronger 21% clip and beat by $0.03 or 95 bps. Revenue was driven by strong comps in the U.S. that in turn were supported by higher pricing and volume. Total comps increased by 8.1% with a 7.6% comp in the U.S. The problem arises with the guidance which is calling for only flat to slightly higher revenue in 2022 and for EPS below the consensus target. What this means for us is that earnings are priced into this market. 

Looking at the stock from the valuation perspective, it is trading at roughly 22X its earnings compared to a lower 19.2X for the broad market S&P 500 index which makes it slightly overvalued. The dividend helps, the now 2.20% dividend yield (the board just upped the payout by 15%) is almost double the broad market average at these valuations and there is a positive outlook for dividend growth. The company is only paying out about 45% of its earnings with few impediments to cash flow on the balance sheet and there is history to support the outlook. The company has increased the payout for 12 years at a near 20% CAGR that we find impressive. In our view, the CAGR may wane over time but the increases will linger long into the future. 

Sell-Side Sentiment May Be Shifting In Home Depot 

The analysts are still bullish on Home Depot but have yet to comment on the Q4 results and outlook. The Marketbeat.com consensus rating is a firm Buy with a price target 25% above the current action. The price target and sentiment have been on the rise over the last 30-day and 90-day periods with one noteworthy change investors should be aware of. The institutional activity, while bullish over the past four quarters, shifted in Q4 in both volume (reduction) and balance (even vs net-buying). Since then, the Q1 2022 activity has been noticeably stronger and firmly in favor of the bears. The net-selling is worth a mere $0.45 billion or about 0.12% of the market cap but may become stronger. In any event, so long as the institutions are net-sellers there will be a headwind for price action. 

The Technical Outlook: Home Depot Confirms Downtrend 

Shares of Home Depot are down more than 3.0% in premarket trading and worse, trading at a new low. The new low breaks support at the $343 level and confirm the downtrend that began earlier this year. Now, with price action below support, there is a danger of doubling the fall of 17% to $326 which is consistent with an important support/resistance level set in the fall of 2021. If price action falls to this level, we would expect to see vigorous buying.