Looking for value in the stock market’s sale bin
These are rough times for the stock market and there is probably more trouble ahead. The S&P 500 Composite Index has fallen to bear market territory, down 22.9% year to date. The S&P/TSX Composite, which had been in positive territory all year thanks to the rebound in the energy sector, has fallen into correction, with a year-to-date loss of 10.8%.
Companies that shone during the pandemic are now out of favour. Many of those that foundered while we were confined to our homes are prospering.
The best performers include conventional energy companies, Canadian banks, defence stocks, gold miners, and commodities stocks.
The biggest losers include several giant high-tech companies including Shopify Inc. (down over 81% from its 52-week high), Netflix Inc. (down 75%), Meta Platforms Inc. (off 57%), and Amazon.com Inc. (down 44%).
We’ve also seen setbacks for green energy companies, stay-at-home services like Zoom and Teladoc Health, and home improvement companies, such as Home Depot and Lowe’s.
I think there are some good buys among these battered rejects.
One is Home Depot Inc. (NYSE: HD). It’s a retail giant and is included in the Dow Jones Industrial Average. As of the end of 2021, the company operated a total of 2,317 retail stores in all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, 10 Canadian provinces, and Mexico. The company employs approximately 500,000 people.
The stock closed on June 17 at $270.73 (prices in U.S. dollars), down 36% from its 52-week (and all-time) high of $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 the fourth quarter, HD reported sales of $35.7 billion, up $3.5 billion, or 10.7%, 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 $151.2 billion (a record). That was an increase of $19 billion, or 14.4%, 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% in 2021.
The company is still very profitable. Net earnings for the fourth quarter were $3.4 billion ($3.21 per diluted share), compared with $2.9 billion ($2.65 per share) the year before. On a per share basis, that was up 21.1% year-over-year.
For the full year, net earnings were $16.4 billion ($15.53 per share), compared with $12.9 billion ($11.94 per share) in fiscal 2020. That was a 30.1% increase on a per share basis.
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% increase in the quarterly dividend, to $1.90 ($7.60 per year). Based on the recent closing price that works out to a respectable yield of 2.8%. The p/e ratio is reasonable, but not dirt cheap, at 17.1.
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.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
Notes and Disclaimer
Content © 2022 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.