Home Depot (HD) is a BUY!

I have been saying that HD is a buy for the last 2 weeks. Wall Street is throwing it in the same ugly bucket as home builders and that is WRONG! It is true that Home builders (TOL, HOV, LEN, CTX) and Home Depot have been both beaten down by the housing slump but there is more to the story.

We can all agree that the HUGE inventory is what is killing the home builder. High supply= no pricing power for them. To be more specific, only locations where house prices have fallen 30+% are where buyers have showed up. This is a business you don't want to be in!

In contrast, Home Depot doesn't fully depend on new homes being built. Home improvement will be the new new thing (again). Let me explain: I see the next big trend developing to be home improvement. During the boom, the game plan was to sell your house and buy a new one. There was little incentive to renovate because your old house will most likely be bought as a tear down. It was too easy to get a big enough offer to pay off your mortgage and upgrade. That possibility is dead. In the post-boom summer rebate checks define the playing field.
There still is plenty of homeowners that don't own sub prime loans and have stable enough income to pay off their mortgage. Rebate checks will be spent towards home improvement, such as lawn care and insulation. The CEO of Owens Corning estimates that there are about 60 million homes under-insulated. When you think home improvement think Home Depot. A beautiful lawn may be one of the simplest, and to some the funnest, way to improve home value: curb appeal. Moreover, winter is coming and natural gas is hitting new high on a daily basis. Consumers will need to protect their wallets by lowering their heating bills. What's smarter than buying some Pink Panther and insulating your roof?
More on insulation and natural gas plays later.

Last week my theory was affirmed. Surprisingly strong May retail numbers came out with "eye-popping" 2.4% sales growth in home improvement retailers and furniture stores when compared to April.

Home Depot has a lot more going for it. Firstly, it beat last quarter estimates by $0.04 (0.41 vs 0.37) but the stock fell due to lack of guidance. Wall Street is exaggerating the weakness in Home Depot as evidenced by the Quarter beat. Moreover, I do see guidance. Ever since the HD reported, insiders have been purchasing plenty of shares. About 7 million shares ($190mm) have been bought in the last 3 weeks. http://www.insider-monitor.com/trading/cik354950.html

Lastly, I want to touch upon leadership. Talking to a former district manager of Home Depot, I heard first had how poor of a retail leader Robert Nardelli was. I recently read an interview with the new CEO, Frank Blake, in the WSJ. I was very impressed. He is a man not afraid to create change and very aware of the weakness Nardelli created. I recommend the interview as a read.

HD is a Buy
1. Growing trend towards home improvement
2. Insider buying shares
3. Good leadership who are aware of the problems and doing something about it

Risk Management will be updated soon