These are rough times for the stock market and there is probably more trouble ahead. The S&P 500 is back in correction territory, down 10.5 per cent from its Jan. 3 closing high of 4,796.56. The S&P/TSX Composite, which had been in positive territory all year thanks to the rebound in the energy sector, has fallen into the red with a year-to-date loss of 1.1 per cent. That’s not a big decline but it’s worrisome.
Companies that shone during the pandemic are now out of favour. Many of those that struggled while we were confined to our homes are prospering.
The best performers include conventional energy companies, defence stocks, gold miners and commodities stocks.
The biggest losers include giant high-tech companies such as Shopify Inc. and Netflix Inc., but we’ve also seen setbacks for green energy companies, stay-at-home services such as Zoom Communications Inc. and Teladoc Health Inc., and home improvement companies such as Home Depot Inc. and Lowe’s Cos. Inc.
I think there are some good buys among these battered rejects.
One is retail giant Home Depot (HD). The stock closed on Monday at US$304.94, down 27.5 per cent from its 52-week (and all-time) high of US$420.61.
The rationale for HD’s rise during the pandemic was simple. With all the restrictions on travel, social events, dining, etc., people had little on which to spend their money. Fixing up the house was among the few viable options, and do-it-yourself retailers thrived.
Now that most restrictions have been lifted (even though the pandemic is by no means history), there are more spending options. Moreover, with interest rates rising, the cost of financing a major home renovation, perhaps through a home equity line of credit, is getting expensive. That’s a downer for the growth prospects of Home Depot and similar companies.
The company’s results for the fourth quarter and fiscal 2021 indicate the fall-off was starting to take hold by year-end. Moreover, guidance for 2022 was discouraging and the stock sold off.
For its fiscal fourth quarter ended Jan. 30, HD reported sales of US$35.7-billion, up US$3.5-billion or 10.7 per cent from the same period in 2020. At first glance, that looks respectable. But in fact, fourth-quarter sales growth was well down compared with earlier in the year. For all of 2021, sales were US$151.2-billion (a record). That was an increase of US$19-billion, or 14.4 per cent, from fiscal 2020.
Management expects this year won’t be anywhere close. The forecast for sales growth in 2022 is that it will be “slightly positive.” That’s a big drop from 14.4 per cent in 2021.
The company is still very profitable. Net earnings for the fourth quarter were US$3.4-billion (US$3.21 per diluted share), compared with US$2.9-billion (US$2.65) the year before. On a per share basis, that was up 21.1 per cent year-over-year.
The company projects 2022 earnings per share growth will be in the low single digits.
The gloomy outlook didn’t stop the board of directors from approving a 15-per-cent increase in the quarterly dividend, to US$1.90 (US$7.60 per year). Based on Monday’s closing price that works out to a respectable yield of 2.5 per cent.
The stock has rallied modestly from its March low of US$293.29 and seems to be trying to stabilize in the US$300-US$320 range. The price-to-earnings ratio is reasonable, but not dirt cheap, at 19.3.
The company has a long history of gradually increasing shareholder value. Five years ago, you could have bought shares at about half the current price. Except for 2021, it has increased its dividend every year for the past decade.
I recommend shares in Home Depot for patient investors. The stock offers long-term capital gains potential and in the interim, you will receive a respectable dividend that will likely continue to rise.
Given the instability of the markets, I suggest buying a half position at this time. If the share price slips below US$275, add to it. This company may be in for a rough period but that will pass, and the stock will flourish again.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe
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