Home Depot Builds on Housing's Hope

With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards. A better way might be to look for stocks based on what you already know and own.

Motley Fool CAPS helps you focus your energies by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently on your active pick list, stocks picked by highly-rated players with lists similar to yours, industries in which you currently have active picks, and targets areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies with which to begin your own due diligence and research.

Buy what you know
Based on my outperform ratings on home improvement retailers like Lowe's (NYS: LOW) and Lumber Liquidators (NYS: LL) , as well as my underperform rating on the likes of paint specialist Sherwin-Williams (NYS: SHW) in the specialty retail sector, the CAPS supercomputer thought I also might be interested in another big box DIY shop -- Home Depot (NYS: HD) . It was one of five Stocks of the Day it offered up for my consideration last week.

With the housing industry still dead, it's counterintuitive that these specialty retailers should be advancing, so let's see what Home Depot has going for it that might still warrant an investment, even if the supercomputer hasn't picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.

Home Depot Snapshot

Source: Motley Fool CAPS; S&P Capital IQ

Here we go again
It's certainly a story we've all heard before: housing has bottomed, it's turned a corner, "recovery summer" is here! This time, at least, there may be a basis for it. According to the folks at Zillow, annual home prices increased for the first time in five years. Albeit it was just 0.2%, but the green shoots have to put roots down somewhere.

I'll admit to being a hard sell on this one though. Previously, Zillow has said that housing won't recover until sometime next year so, despite four months of rising home values, I'm not ready to say happy days are here again.

Going pro
Last quarter, Home Depot said weather had more to do with its success than any real improvement in the economy (and that may be what's driving the housing market, too). The non-professional segment added 7% to revenues in the first quarter, while professional contractor sales rose 5%. What's giving Home Depot hope is that sales by the pros who spend more than $10,000 at a time -- some 12% of the pro customer cohort -- boosted sales 11% over the year-ago period. In total, same store sales jumped 6% from last year.

Sherwin-Williams, which also caters to the pro and the consumer, saw similar results, with paint store sales jumping 15%, and consumer group sales up 6%. While a lot of its growth was due to passing on price increases, there were volume increases, as well, to help provide a foundation.

Lowe's did better, too, but with first quarter comps of just 2.6%, it was not nearly as robust as its rival. Some analysts attribute that to switching from periodic sales to an everyday low price model, which was blamed for the implosion of J.C. Penney (NYS: JCP) . Of course, Penney's customers were trained to expect sales throughout the year, creating a much bigger disruption when they stopped. At Lowe's, customers are not shopping for its door-buster prices.

Still building a future
At 20 times trailing earnings and 16 times estimates, Home Depot trades at a slight premium to its rival, though better operational performance might account for that. With a model skewed more towards the professional than Lowe's, Home Depot might also be expected to benefit more if the recovery does gain hold.

And that's perhaps my biggest concern. Pending sales of new homes unexpectedly fell in June by 1.4% after May's gains were revised downward. As I noted previously, it could be just the warmer weather pulling sales forward, though CAPS member coffeeguy365 is counting on housing's recovery to drive the Depot's gains. Being a housing bear still, I'm holding off on following him in.

I own shares of Lowe's primarily because of the discount offered (and generally higher customer satisfaction grades), but let me know on the Home Depot CAPS page, or the comments section below, if you think it still deserves the premium it commands, and will continue to grow going forward.

As difficult as the economy's been, there are still a handful of retailers who are actually growing revenue, like Home Depot. The Motley Fool has a free report detailing two cash kings that are changing the face of retail, and profiting for investors along the way. You can download the free report today and find out who these two cash cows are that will survive the death of Wal-Mart.

The article Home Depot Builds on Housing's Hope originally appeared on Fool.com.

Fool contributor Rich Duprey owns shares of Lowe's, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Lumber Liquidators and Zillow. Motley Fool newsletter services have recommended buying shares of The Home Depot, Sherwin-Williams, Zillow, and Lumber Liquidators. Motley Fool newsletter services have recommended writing covered calls on Lowe's. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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