E Huge Rally Has Home Depot In Overbought Territory Ahead Of Earnings

  • 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.

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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.

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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.

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William K. 4 weeks ago Member's comment

What has happened with Home Depot is that somehow they got it all right, or at least very close to all right. I buy from them quite often and it is clear that they have most things figured out right. That is rather funny in that there is a serious competitor next door, they share the same parking lot entrance, even. There are always plenty of empty spots to park in the Lowe's lot even when the Home Depot lot is quite full. So it gets down to the fact that some stores have :it" and some do not. That explains why the stock is doing so well, which is that the stores are indeed doing so well. And it is strange about the lumber pricing. If their costs have increased then the rise in sell price would just be a pass-thru increase. So how are they making so much more on lumber now?