Why Home Depot Is A Great Stock To Buy
The Dynamic Wealth Report
June 17, 2009
Would You Buy This House?
I just made a big change in my life… and along with it, I uncovered a
great investment idea.
As many of you know, Linda and I started looking for a new home a few
months back. Prices were down. They’d finally reached a level we thought
was reasonable… so we took action. We started by figuring out where we
wanted to live. Then we narrowed the search down from there.
The options seemed plentiful at first.
Then we realized a sad fact. Most of the properties on the market were
either bank owned or short sales (about to be bank owned). We were
getting a firsthand look at the devastating housing crisis. Our hearts
go out to everyone who has lost their home.
Our biggest requirement was land.
We needed a property with enough space to comfortably house Linda’s
three
and one-half horses (yes, one of them is pregnant), the dogs, and us.
We finally found the perfect property… the house is a mess.
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The roof leaks. Some of the plumbing is installed wrong. The electrical
job is clearly “home grown”. The carpets need replacing. Tile is damaged
and cracked. The bathrooms need to be redone… just like the kitchen.
And that’s just half the story…
It’s been years since the last good cleaning. A paint job is badly
needed. Many of the doors need replacing. The fireplace needs work. An
old shed out back is about to fall over. The landscape watering system
leaks like a sieve. And, all the trees on the property need trimming. (Wow, that’s a lot of stuff to do!)
So, here’s the question, would you buy this house?
I did. The land and the location can’t be beat.
Best of all, I got it at a great price.
The property was bank owned – which explains the noticeable lack of
maintenance and upkeep. I won’t bore you with all the details of the
closing. Let’s just say the closing was a miracle.
What I will tell you about is the investment discovery I made.
I was talking with my realtor about the condition of the house when he
said something quite surprising, “I’ve seen worse.”
My realtor is a great guy. He recently started selling bank owned
properties.
His stories about these properties are shocking. Some of the houses for
sale are real dives. The damage and destruction done by frustrated
owners is mind boggling. The neglect from people about to be evicted is
glaring.
A lot of these homes are being picked up on the cheap by speculators.
They survey the house, do a quick back of the envelope estimate on
repairs, then lowball the bank. Sometimes they miss out. But, sometimes
they lock in a great deal.
The numbers don’t lie.
Foreclosures in the Phoenix area are down 41% from just three months
ago. Right now, just over 12,000 foreclosure homes are listed for sale.
So where’s the investment idea in all this?
Rest assured, it’s not investing in foreclosed homes. No cheesy late
night infomercial here! Though, I’ve always liked real estate as an
investment.
Here’s a better idea… Home Depot (HD). Now hear me out.
I started buying Home Depot in my personal account late last year. I
even wrote about it at the time. Back then the story looked good. Right
now it looks even better.
The decline in foreclosures means many of these houses are being bought
up. And trust me, they all need repairs. Where do you think all the
“do-it-yourself” real estate investors go for supplies – Home Depot, of
course.
Now, I’m not expecting business to jump. But I am expecting them to beat
analyst estimates. How’s this possible? It’s because research analysts
are cutting back estimates.
While analysts slash estimates, I’m looking for the business to get
stronger. Management’s cutting costs, inventories match demand levels,
and profitability is the key.
Just look at the announcement from June 10th… just a few days ago:
“Home Depot raises full-year earnings guidance”
I’m guessing I don’t need to explain any further. That headline says it
all.
This is a sign things are getting a little better. Now, financial numbers
for Home Depot aren’t going to be off the charts. As a matter of fact,
the company’s still expecting an overall decline in revenue this year. But the increase in earnings shows we’ve hit bottom in the industry… and
it should start improving from here.
Right now, the company pays a strong dividend with a yield of 3.7%. The
stock is trading just a few points from recent highs set back in April. If you want to profit from the foreclosure market, take the easy
route… buy some Home Depot stock.
• Lumber (Over $213 per 1,000 bd. Ft.)
Lumber has seen quite a run up in prices over the last few weeks. As the
economy appears to be rebounding, commodity demand is jumping. I think
this is an early sign of a homebuilding recovery.
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