The Bull Market Keeps Growing: 3 Reasons to Buy Home Depot Stock Like There's No Tomorrow

The housing market is set for a significant recovery.

Home Depot (HD) has been regarded as one of the top-performing stocks over the years, and it continues to uphold its strong competitive advantages.

As the largest player in the expansive home improvement retail sector, Home Depot operates within a market that approaches $1 trillion. This market is dominated by a duopoly between Home Depot and its rival, Lowe's, enabling both companies to achieve substantial operating margins and high returns on invested capital.

Although Home Depot faced challenges following the pandemic, specifically due to a sluggish housing market, this situation presents an opportunity for recovery as the housing sector is expected to rebound. Let’s explore three compelling reasons to invest in Home Depot now.

1. Anticipated Housing Recovery

As the housing boom sparked by the pandemic subsided, a rise in interest rates led to a decline in home sales, negatively impacting Home Depot's business operations.

Recently, the Federal Reserve began its cycle of rate cuts with a significant reduction, hinting at more cuts to come. Expectations suggest mortgage rates will follow suit, with projections of a total rate cut of approximately 1.5 percentage points by next year.

Currently, existing home sales are about 30% lower than pre-pandemic levels, indicating a significant potential for recovery in this market. A resurgence in home sales will likely fuel growth for Home Depot.

Moreover, the United States is facing a housing shortage of millions of homes, prompting both major political candidates to propose strategies to remedy this shortfall. As supply and demand in the housing market stabilize, Home Depot stands poised to benefit.

2. Record High Home Equity

Despite the slowdown in home sales, home prices have continued to rise. More Americans are choosing to stay in their homes longer, resulting in unprecedented levels of home equity. Currently, homeowners possess more than $32 trillion in equity, and access to this wealth will improve as lending rates for home-equity loans decrease. The average homeowner has approximately $214,000 in equity, which is expected to drive spending on home improvement initiatives.

Additionally, with the stock market reaching all-time highs, homeowners have another source of financial leverage for their projects.

The convergence of these factors could enhance the housing recovery and lead to a surge in Home Depot’s stock performance.

3. Strong Competitive Edge

Home Depot's recent sales have dipped, reporting a decline of 3.3% in comparable sales for its fiscal second quarter (ending July 28), and it anticipates a yearly decline between 3% and 4%.

Yet, despite these declines, Home Depot's profit margins remain robust, with forecasts suggesting an operating margin of 13.5% to 13.6% for fiscal 2024. Although this represents a drop from previous highs, Home Depot is well-situated to enhance profitability with the upcoming market recovery.

Such profitability metrics should reassure investors regarding the company's ability to navigate industry challenges.

Conclusion: Why Buy Home Depot Now?

While Home Depot’s price-to-earnings ratio of 27 may not seem particularly appealing at this moment, there's substantial upside potential once the business shifts back into growth mode. Furthermore, its acquisition of SRS Distribution is expected to yield benefits that will strengthen its presence in the professional market.

Overall, Home Depot is a proven leader with a strong economic moat, well-positioned to take advantage of the housing recovery and initiatives aimed at addressing the housing shortage across the United States.

housing, recovery, stocks