What Took Home Depot to New Highs in 2012?

Now that 2012 is nearly in the rearview mirror, investors are beginning to sift through the market for the best stocks of the upcoming year. The future is plagued with uncertainty, but that has always been the case, and it has never stopped us from seeking out long-term values. One way to find those values is to look for companies with a long history of success. The Dow Jones Industrial Average contains many such companies, but some are better investments than others.

Today we'll be taking a look at Home Depot , a Dow component since 1999, to see whether its past-year performance holds some clues for 2013.

First-half recap
Home Depot has been one of the Dow's superstars in 2012, as you can see here:

HD Total Return Price data by YCharts.

Let's take a look at a few financial snapshots of its recent performance to see if this growth has been driven by fundamentals or something else:

Sources: Morningstar; Yahoo! Finance; YCharts. TTM = trailing 12 months. MRQ = most recent quarterly.

What the numbers don't tell you
At first glance, it certainly appears that Home Depot has generated more excitement than growth. A 16% growth rate is nothing to sneeze at, but it's also worth keeping an eye on valuation, which is at multiyear highs in terms of P/E and is almost 50% higher than it was at the end of 2011's third quarter.

There have been a number of economic narratives this year, but the one most on Home Depot's side is the housing rebound. Whether homeowners are sprucing up their places or homebuilders are buying up supplies, Home Depot and its home-improvement retailing peer Lowe's will benefit from the demand.

According to recent earnings reports, major homebuilders PulteGroup , D.R. Horton , and Hovnanian are all seeing substantial new-contract growth over 2011. This backs up recent reports that housing starts are at multiyear highs, just like Home Depot's P/E ratio.

The "sprucing up" option has also been gathering steam. A glance at paint companies Sherwin Williams , PPG Industries , and Valspar shows three tightly focused companies that have grown at an even faster rate than Home Depot, with all but PPG well above their five-year average P/E ratios. Optimism is everywhere in the housing industry.

The Case-Shiller Home Price Index has finally bounced in 2012, which will be important in adjusting homebuying perceptions. No one wants to buy a house they expect will decline in value, particularly after witnessing the financial horrors of the housing crash. Stronger home prices create more demand for all the things you'd find in a Home Depot.

The only issue with Home Depot -- which is an issue shared by many construction-related peers -- is that its valuation is getting ahead of its fundamentals. Exuberance precedes recovery. If you've been riding that excitement over the past year, you're in great shape -- but if you're looking at home improvement stocks today, it's worth considering how much growth Home Depot will need in 2013 to justify another year of gains like 2012's. The 14.1% analyst consensus doesn't seem optimistic enough.

Home Depot's impressive growth has made its dividend yield a bit smaller than many of its Dow peers. Shareholders aren't complaining now, but if a correction's in store, it would be worthwhile to shift some funds over to a more stable dividend stalwart. The Fool has taken a closer look at "The 3 Dow Stocks Dividend Investors Need," and we're offering all the details at no cost and no obligation. Find your next safe investment haven when you click here for the free information you need.

The article What Took Home Depot to New Highs in 2012? originally appeared on Fool.com.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.Motley Fool newsletter services have recommended buying shares of Home Depot and Sherwin-Williams. Motley Fool newsletter services have recommended writing covered calls on Lowe's Companies. 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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