Range-bound Home Depot stock still is, lower prices ahead

Key Points

• Home Depot had a sluggish quarter and gave weak guidance, setting it up for a correction. 
• A move below critical support targets would put the stock back within a trading range that has dominated conditions for two years. 
• Capital returns are reliable. The dividend increased, but share repurchases may slow in 2024. 

Investors hoping to see Home Depot’s NYSE: HD stock price move higher in 2024 may have to wait until later for it to happen. As bullish as the recent break-out was, the ensuing pattern is a Rising Wedge, and now the market is falling. The Q4 results and guidance are mixed. The company isn’t in danger of unraveling, and the capital return is reliable, but weakness is creeping into the picture for 2024, and the guidance may be optimistic. The takeaway is that Home Depot will likely fall below critical support and back into a trading range that could dominate the price action for the next few quarters. 

A Rising Wedge is a price pattern that forms in an uptrend where higher highs and higher lows converge to a point. The market seems to point higher but has become overextended and ripe for a reversal. Share prices tend to correct from the peak, as Home Depot’s market is doing now; how deep the correction gets depends on numerous factors. Home Depot price action may yet find support above the critical level, recently broken resistance, but the level will likely be tested for support. 

Home Depot had a decent Q4 and gives weak guidance 

Home Depot had a decent Q4 overall, but the data shows core business continues to weaken, and guidance is not inspiring. The company reported $34.79 billion in net revenue, a decline of 2.9% compared to last year. The revenue outpaces the Marketbeat.com consensus estimate by a very slim margin, which is insufficient to offset other details. The comps fell 3.5%, with the US leading. US comps fell 4%, with tickets and transactions alarmingly low. Comps are down for the 5th consecutive quarter and accelerating with ticket count at a two-year low and transaction size at a multiyear low. 

Margin news is equally mixed, outpacing the consensus but down compared to last year. The result is GAAP EPS of $2.82, down 14.5% despite $0.04 in outperformance. The worst news is still to come. The company aims for a tepid 1% growth in 2024 and may overestimate the market. The 1% includes an extra 53rd week, which puts the comp at -1%, and the EPS decline will be deeper. Both revenue and earnings are guided below consensus and are leading the market to reset its expectations for the share price and retail sector.

The capital return outlook may weigh on the price action

Capital returns, including dividends and share repurchases, somewhat support Home Depot’s price action. Dividends amount to roughly 2.45% annually, with the 7.7% increase issued in Q1 and repurchases reduced the share count by 2.4% in 2023. Both are expected to continue in 2024, but repurchase activity may slow due to sluggish business. That and the above-average 24X earnings multiple set the stock up for weakness. 

Analysts may also weigh on the action as the quarter progresses. The analysts rate the stock a consensus Moderate Buy and have been raising their price targets, but the average target lags the market. Suppose the analysts stop revising their estimates higher or begin to trim them. In that case, Home Depot will have difficulty advancing from current levels as investors reset their expectations to match. 

The technical outlook: Home Depot is in danger of a deeper dive

Home Depot’s price action fell more than 1% after the release. It shows support at the 30-day EMA but there is danger it will move lower. The MACD and stochastic are weakening and show softness within a bull market. A move below the 30-day EMA would invite more bearish activity and could send the market down to firmer support levels. The best target for solid support is near $345; a move below puts the market back into its trading range with a high likelihood of hitting the low end of the range before mid-year.