• Over the last 10 weeks, Home Depot (HD) has rallied over 40% from its low to its high. The home improvement retailer has benefitted from a booming housing market and soaring lumber prices. The big rally has moved the stock in to overbought territory based on the 10-week RSI and the weekly stochastic indicators. It has also moved the stock up to a trend line that connects the highs from the last year and a half.

One thing that really jumps out to me is how the rally started after the stock found support at its 52-week moving average back in early March. The stock also seemed to use the 52-week as a springboard back in May ’19. The stock is now approximately 17% above the moving average.

The Fundamentals have Helped Fuel the Rally

When I first started looking at the fundamental indicators for Home Depot, there was one particular indicator that jumped off the page. I didn’t believe the figure and ended up verifying it on four different sites. The return on equity is a whopping 14,061%. I thought it had to be a mistake, but checked it on Investor’s Business Daily, Yahoo Finance, Seeking Alpha, and the Wall Street Journal.

Apparently the fundamental analysis screener for Tickeron had a hard time with that figure as well. When I first checked, the SMR rating was showing 100 (the worst possible rating) and my guess is that it found the SMR to be incalculable. I had the tech team look into the matter and they were able to get the rating fixed and it is now correctly showing a rating of 1, the best possible rating.

The other pieces of the SMR rating, the sales growth and the profit margin, are both decent. Sales grew by 25% last quarter and they’ve grown by 8% per year over the last three years. The profit margin is at 12.9% and that is above the industry average.

The SMR rating is just one of four indicators where Home Depot gets positive marks. It also scores well in its valuation rating, the profit vs. risk rating, and the price growth rating. The only area where the stock scores below average is in the outlook rating.

Home Depot has seen earnings grow by 14% per year over the last three years and they jumped by 20% in the fourth quarter. Analysts are expecting earnings to jump by 43.3% in the first quarter.

First quarter earnings results are due out on May 18. Sales are expected to increase by 24.2% for the quarter. What’s really interesting is that earnings are only expected to grow by 7% for 2021 and sales are only expected to grow by 3.1%. I find those estimates to be extremely low, but the company will face much higher comps in the second half of the year.

Sentiment toward Home Depot Slightly More Bullish than the Average Stock

Turning our attention to the sentiment indicators for Home Depot we see that there is a slight bullish skew to the indicators. There are 35 analysts following the stock with 25 “buy” ratings, nine “hold” ratings, and one “sell” rating. This gives us a buy percentage, in terms of buy ratings as a percentage of all ratings, of 71.4%. The average buy percentage falls in the 65% to 75%, so Home Depot’s is right in the middle of the average range.

The short interest ratio is a little low at 2.1 and that’s after short interest jumped from 7.99 million shares on March 15 to 10.48 million shares on April 15. The latest short interest figures should come out any day and it will be interesting to see how they change given the big rally. What I suspect has happened is that the short interest ratio fell as the stock was going through the big rally and now it is starting to build as investors expect a pullback from the overbought levels.

Yet another indicator that falls in the average range is the put/call ratio. Home Depot’s ratio is at 1.02 currently and the average range is 0.9 to 1.1. There are 139,677 puts open currently and 137,043 calls open. If we look back to February 23 when Home Depot last reported earnings, the put/call ratio was only 0.86 and it has been steadily trending higher since then. Seeing the ratio trend higher suggests that option traders are becoming more bearish, or at least a little less bullish than they were three months ago.

When we break all three analysis styles down, the biggest concern comes from the technical side and that is due to how overbought the stock is based on the weekly OB/OS indicators. The fundamentals are strong, especially the profitability measurements. The sentiment isn’t really an issue with two of the three indicators only in the average range and one that is slightly more bullish than the average stock.

Looking back at past earnings reports, there have been a couple of instances where the prevailing trend changed right around the time earnings came out. It happened back in February and it happened last summer. With that in mind, even though I am bullish on Home Depot for the long term, I can see Home Depot pulling back after earnings. I don’t think it will be a big pullback, but just enough to move the stock out of overbought territory and down toward the 13-week moving average. At that point I would consider adding the stock to my portfolio.