Home Depot's stock is down more than 12% since early 2021.
During the pandemic, many people stayed at home and spent money on home renovation projects, fueling HD stocks, which were still close to 35% last year.
Long-term investors should consider buying dips in HD stocks, especially if they fall toward $350.
Shares of the home improvement retail giant Home Depot (NYSE:) have lost 12.3% so far. Despite the recent decline, HD stock is up more than 35% in the past 52 weeks. By comparison, the index, of which Home Depot is a member, has risen 16.3% in the past 12 months, but has fallen 3.5% since early 2022.
What a difference a few weeks have made to many stock prices on Wall Street. On Dec. 6, Home Depot shares went over $420 to hit an all-time high. But since then, HD stock has lost more than 13%. The 52-week range was $246.59 – $420.61 while the market cap is $382.2 billion.
Atlanta-based Home Depot is the largest home improvement retailer in the world. In FY20, sales exceeded $132.1 billion. The group operates more than 2,300 stores in North America and sells approximately 35,000 products in-store and one million products online.
Highlight recent statistics:
“In 2021, home improvement sales in the United States were approximately $538 billion. By 2025, this amount is expected to exceed $620 billion.”
Home Depot's US market share is nearly 60%. It is followed by Lowe's (NYSE:); private Menards and Ace Hardware; and Build.com a subsidiary of UK-based Ferguson (NYSE: ).
In mid-November, Home Depot released robust Q3 stats. climbed 9.8% year-over-year to $36.8 billion.
Wall Street was pleased to see same-store sales up 6.1%, beating estimates of 2.2%. Management praised continued strong demand for home improvement products, which led to an increase in the average ticket from $72.98 to $82.38. In other words, consumers spent about 13% more when they visited the store.
Net income for the third quarter of 2021 was $4.1 billion, or $3.92 per diluted share. A year ago, comparable figures were a net income of $3.4 billion, or $3.18 per diluted share.
Before the release of the third quarter results, HD stock was about $370. Then, on December 6, it hit a record high of $420.61. At yesterday's close, the stock is near $368, with the current price supporting a 1.65% dividend yield.
We should remind readers that Home Depot will announce its fourth quarter results on February 22 before the market opens. Therefore, it is likely that HD stocks will falter around that date.
Next Move In Home Depot Stock?
Among 35 analysts surveyed via Investing.com, HD stocks have an “ ]outperform” rating, with an average 12-month price target of $408.84. Such a move would represent an increase of approximately 11% from current levels. The target range is between $140.81 and $470.
Analyst consensus estimates polled by Investing.com.
Source: Investing.com
According to a number of valuation models, such as those that consider P/E or P/S multiples, dividends, or terminal values, the average fair value for Home Depot stock through InvestingPro is $381.11.
Fair value averages via InvestingPro.
Source: InvestingPro
Given the recent sell-off on Wall Street, many investors will likely be nervous about how HD stocks will fare as the retailer gears up to report Q4 stats.
In the near term, we expect Home Depot's stock to potentially fall towards $350 or less. After such a potential drop, HD stocks are likely to trade sideways for several weeks until they reach a base, possibly between $345 and $355, then begin another leg.
Therefore, Home Depot bulls with a two- to three-year horizon who are not concerned about short-term volatility may want to consider buying the stocks around these levels for long-term portfolios. Others, who have experience with options strategies and believe that HD stocks could fall even further, may prefer to try a bear put spread.
However, option strategies are not suitable for all retail investors. Therefore, the following discussion is provided for educational purposes only and not as an actual strategy to be followed by the average retail investor. from writing: $366.10
In a bear put spread, a trader has a long put with a higher strike price and a short put with a lower strike price. Both branches of the trade have the same underlying stock (i.e. Home Depot) and the same expiration date.
The trader wants HD stocks to fall in price. However, in a bear put spread, both potential gains and potential loss levels are limited. Such a bear put spread is established for a net cost (or net debit), which represents the maximum loss.
Let's's have a look at this example:
For the first leg of this strategy, the trader can buy an at-the-money (ATM) or somewhat out-of-the-money (OTM) put option, such as the HD March 18 360 strike put option option. This option is currently offered for $12.35. It would cost the trader $1,235 to own this put option which expires in about a month and a half.
For the second part of this strategy, the trader sells an HD put, such as the Mar 18 350 strike put option. The current premium of this option is $8.75. The option seller would receive $875 excluding trading commissions.
Maximum risk
In our example, the maximum risk is equal to the cost of the spread plus commissions. Here is the net cost of the spread $3.60 ($12.35 – $8.75 = $3.60).
Since each option contract represents 100 shares of the underlying stock, we need to multiply $3.60 by 100, which gives us $360 as the maximum risk.
The trader could easily lose this amount if the position is held until expiration and both legs expire worthless, that is, if the price of the Home Depot stock on expiration is above the strike price of the long put ( or $360 in our example).
Maximum profit potential
In a bear put spread, the potential profit is limited to the difference between the two strike prices minus the net cost of the spread plus commissions.
So in our example, the difference between the strike prices is $10 ($360 – $350 = $10). And as we have seen above, the net cost of the spread is $3.60.
The max profit is therefore $6.40 ($10.00 – $3.60 = $6.40) per share, minus commissions. When we multiply $6.40 by 100 shares, the maximum profit for this option strategy comes to $640.
The trader will realize this maximum profit if the price of the HD stock is at or below the strike price of the short put (lower strike price) on expiration (or $350 in our example).
Short put positions are typically assigned on expiration if the stock price is below the strike price (i.e. $350 in this example).
However, there is also the possibility of early allocation. Therefore, the position should be monitored until maturity. At that price, commerce will neither gain nor lose money.
At expiration, the strike price of the long put (i.e. $360 in our example) minus the net premium paid (i.e. $3.60 here) would give us the breakeven price.
In this example: $360 ? $3.60 = $356.40 (minus commissions).
Bottom Line On Home Depot Shares
For most portfolios, we view HD stocks as a solid long-term choice. Despite short-term stock volatility, the growth trajectory remains intact for this home improvement retail giant.
Still, Home Depot's stock may come under further pressure during this earnings season. Therefore, a trading strategy as described above may be suitable for traders with a bearish view on HD stocks.
