Home Depot:  This Stock Has Upside!

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Why?

The housing market is still in shambles here in the Valley of the Sun.  Since collapsing four years ago, there’s still no sign of a firm bottom in the market.

Foreclosures and short sales are the overwhelming majority of homes for sale.  It’s sad to see, but that’s just the way it is right now.  For sellers, it’s agonizing to unload a house at bargain basement prices.

But for buyers, it’s a once in a lifetime opportunity to get in a house at a greatly reduced price.  Do a property search on the internet and you’ll find good deals are everywhere.

But there’s a catch…

Most of these ‘deals’ come with a boatload of renovation costs (ours was no exception).  A few years of neglect is turning thousands of foreclosed homes into a treasure trove of profits… for Home Depot (HD).

Why Home Depot?

Considering the sheer number of homes going through the foreclosure process, there’s going to be a lot of ‘fixing up’ over the next few years. Whether it’s an investor or a homeowner, they’ll be spending big bucks to put some TLC into those neglected homes.

In my case, there’s a Home Depot right down the street.  I stop by the store nearly every night after work for one thing or another.  The worst part is, I can’t walk out of there without spending a small fortune.

And, many others are doing the same thing…

During my numerous trips to Home Depot, I noticed the aisles at my local store were constantly packed.  With so many people fixing up their homes, I don’t expect the lines to get shorter at HD any time soon.

How can you profit from this renovation trend?

Grab yourself some HD shares.

The stock’s been on a tear for the past 10 months.  It’s made a 37% upside run from the July lows of last year.  And it’s currently trading near 52-week highs around $36.

Is there any upside left to the shares?

The home improvement giant just reported first quarter earnings on May 17th.  Earnings came in at $0.50 per share… a 16.3% jump over the same period last year.

At the same time, the company raised their 2011 guidance to $2.24 a share.  They also reaffirmed their revenue outlook of $69.7 billion for fiscal 2011.  Clearly, Home Depot is surviving the foreclosure mess pretty well.

HD looks like a good long-term play on foreclosure renovations...

But in the near term, shares look like they have some room to fall.  The recent broad market weakness is sending HD down towards the 200-day moving average.

Take a look…


HD may drop to the 200-day moving average at the $34-$35 area (blue circle) in coming weeks.  If it does, I consider it a buying opportunity.  The stock will still be in an uptrend and the short-term pullback will have professional investors paying close attention.

But keep a close eye on it, investors may start buying the stock before it drops to that level.

The foreclosure crisis is nowhere near being over…

But judging by HD’s recent earnings, they’re providing a valuable service and making a nice profit during this tough time.  Long-term investors should seriously consider adding HD to their portfolios.

•  FBR Capital upgraded American Eagle Outfitters (AEO) this week. They now have an outperform rating on the stock with a $17 price target.  The teen clothing retailer is growing margins and has plenty of cash on their balance sheet.

•  AGCO Corp. (AGCO) was upgraded to a “buy” rating by UBS.  They put a $60 price target on the stock… that’s 20% upside from current levels.

•  FBR Capital downgraded Lululemon Athletica (LULU) to underperform. Analysts are wary of the company’s inventory constraints.

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