The Bull Market Keeps Growing: 3 Reasons to Buy Home Depot Stock Like There's No Tomorrow

The housing market is on the brink of a recovery.

Home Depot (HD -0.94%) is among the highest-performing stocks in history and continues to showcase strong competitive advantages.

As the largest player in the substantial home improvement retail sector, which boasts a market potential nearing $1 trillion, it effectively operates a duopoly alongside its main competitor, Lowe's. This partnership allows both companies to enjoy significant operating margins and solid returns on their investments.

Since the peak of the pandemic, Home Depot has faced challenges as the housing market has slowed down, which directly affects its business due to its close ties with home sales and renovation projects. However, this situation sets the stage for a potential recovery in stock performance as the housing market is anticipated to rebound. Below, we explore three reasons why investing in this stock now could be beneficial.

1. The Housing Recovery is Approaching

Following the pandemic-driven housing boom, rising interest rates led to a sharp decline in home sales, resulting in a downturn for Home Depot’s operations.

Conversely, the Federal Reserve recently initiated a cycle of rate cuts, starting with a significant reduction of 50 basis points last month. Although mortgage rates have yet to reflect these changes, further reductions are expected, with the Fed projecting an additional decrease of 1.5 percentage points by the end of the coming year.

Current levels of existing home sales are about 30% lower than pre-pandemic figures, suggesting a substantial opportunity for growth in the housing market. As home sales recover, Home Depot is likely to benefit from increasing business activity.

Moreover, the U.S. is facing a housing shortage estimated to be in the millions. Both major political candidates are proposing plans to address this shortfall. As the housing supply and demand stabilizes, Home Depot stands to gain significantly.

2. Record High Home Equity

While home sales may have stagnated, home prices have been rising. More individuals are choosing to stay in their homes longer, resulting in unprecedented levels of home equity. Currently, Americans hold over $32 trillion in home equity, and accessing these funds will become easier as lending rates for home-equity loans and lines of credit decrease. The average homeowner now possesses around $214,000 in equity, which is likely to fuel spending on home improvement projects.

Add to this the fact that the stock market is hitting record highs, providing another avenue for funding such home enhancements.

Together, these factors are expected to complement the anticipated housing recovery and potentially lead to a surge in Home Depot’s stock value.

3. Strong Competitive Position

Recently, Home Depot has faced declining sales, reporting a comparable sales drop of 3.3% in its fiscal second quarter, which ended on July 28. The company predicts a decline of 3% to 4% in comparable sales for the entire fiscal year.

Despite this downturn, Home Depot's profit margins remain robust. Projections indicate an operating margin of approximately 13.5% to 13.6% for fiscal 2024. Although this is a decrease from previous highs, Home Depot is well-positioned to enhance its profitability as the recovery unfolds.

This resilience in margins should give investors confidence that the company can navigate through any emerging challenges in the industry.

Why Consider Home Depot Now?

The current valuation of Home Depot may appear steep, with a price-to-earnings ratio sitting at 27. However, significant leverage exists in the business model once growth resumes. Additionally, the company's acquisition of SRS Distribution is expected to start producing results and enhancing its access to the professional market.

Home Depot is a proven success with a substantial competitive edge, positioning it to capitalize on the impending housing recovery and address the growing housing shortage across the United States.

housing, investment, recovery