Why I’m Not Buying the Rally in Home Depot’s (NYSE: HD) Stock

Home Depot (NYSE: HD) reports earnings for the third quarter today. And they may be relatively good. The company’s second-quarter earnings were. But I’m still not buying, and I’ll tell you why…

Home Depot stock shot up about 17% to start the year, peaking north of $395 in March. However, it gave back that gain and more in the months that followed, bottoming out at $325 in May.

That would have been a good time to buy, as HD stock has since rallied back above $400 per share. But I’m not sure that the foundation for another leg up is there. 

The Truth About Home Depot Earnings

For one thing, second-quarter results may have topped analysts’ estimates, but they weren’t exactly stellar. Operating income for the quarter edged down from $6.6 billion to $6.5 billion, and net earnings slipped to $4.6 billion ($4.60 per share) from $4.7 billion ($4.65 per share).

Beyond that, Home Depot expects full-year comparable sales to decline by 3%–4% compared with last year. Previously, the chain had forecast a 1% decline.

Home Depot’s total annual sales are expected to rise 2.5%–3.5%. However, that’s largely due to its recent acquisition of SRS Distribution — a company that sells supplies to landscaping, roofing, and pool businesses. Without that padding, we’d be looking at a top-line decline.  

The reason for this is pretty straightforward: The housing market has been wheezing for more than a year. Prices have been astronomical ever since the pandemic. And rising interest rates pushed prices further out of reach for even more potential buyers.

Home sales fell to their lowest level since 2010 in September, declining 3.5% year over year and 1% month over month. And yet the median price of existing homes sold still managed to climb 3% in September, bringing the streak of annual price gains to 15 consecutive months.

Homes are also sitting on the market longer — an average of 28 days compared with 21 days a year ago. And first-time buyers are still stapled to the sidelines, making up just 26% of September sales, matching the all-time low from August. 

So we’re effectively in a housing environment where prices are rising even as sales are falling. That’s not sustainable.  

Now, you might think we’d see some pricing relief with the Fed cutting interest rates, but that’s not really the case. The average 30-year mortgage rate has been above 6% for two years — and is likely to stay above that level for the foreseeable future.

That’s because mortgage rates are more closely tied to demand for government bonds. When Treasury demand increases, mortgage rates tend to fall.

But with strong economic growth and a rising budget deficit, demand for U.S. debt has been, and will likely remain, subdued.

Remember, President Trump added nearly $8 trillion to the national debt in his first term. And the economic proposals he ran on figure to add another $7.5 trillion. 

Trump’s election won’t do anything to assuage the economic anxiety permeating the American public, either. Tariffs and trade wars, mass deportations, gutting the federal bureaucracy, overhauling health care, repealing legislation like the CHIPS Act and Inflation Reduction Act — all of which Trump has pledged to do — will not stabilize the economy.

Quite the opposite. Such drastic measures will bring a whole new level of uncertainty to the lives of every American. That’s already been an issue for Home Depot, according to the company’s chief financial officer, Richard McPhail. 

McPhail recently told CNBC that internal surveys of customers and contractors show trepidation that’s undermined sales just as much as the shitty housing market has.

“Pros tell us that, for the first time, their customers aren’t just deferring because of higher financing costs,” McPhail said. “They’re deferring because of a sense of greater uncertainty in the economy.”

Of course, the term “deferring” suggests that home improvement projects are being postponed temporarily. But given the macro environment, they may be postponed indefinitely. 

That’s why Home Depot’s stock rebound might not last as long as many investors and analysts believe.

Fight on,

Jason Simpkins

Simpkins is the founder and editor of Secret Stock Files, an investment service that focuses on companies with assets — tangible resources and products that can hold and appreciate in value. He covers mining companies, energy companies, defense contractors, dividend payers, commodities, staples, legacies and more…

In 2023 he joined The Wealth Advisory team as a defense market analyst where he reviews and recommends new military and government opportunities that come across his radar, especially those that spin-off healthy, growing income streams. For more on Jason, check out his editor’s page.

Be sure to visit our Angel Investment Research channel on YouTube and tune into Jason’s podcasts.

Want to hear more from Jason? Sign up to receive emails directly from him ranging from market commentaries to opportunities that he has his eye on. 

@OCSimpkins on Twitter

Fight on,

Jason Simpkins

Simpkins is the founder and editor of Secret Stock Files, an investment service that focuses on companies with assets — tangible resources and products that can hold and appreciate in value. He covers mining companies, energy companies, defense contractors, dividend payers, commodities, staples, legacies and more…

In 2023 he joined The Wealth Advisory team as a defense market analyst where he reviews and recommends new military and government opportunities that come across his radar, especially those that spin-off healthy, growing income streams. For more on Jason, check out his editor’s page.

Be sure to visit our Angel Investment Research channel on YouTube and tune into Jason’s podcasts.

Want to hear more from Jason? Sign up to receive emails directly from him ranging from market commentaries to opportunities that he has his eye on. 

@OCSimpkins on Twitter