HOME DEPOT SHARES HAVE BEGUN TO CORRECT. HOW LOW WILL THEY GO?

Home Depot, Inc.

has been a true winner for the bulls ever since the 2009 low – giving the longs a 600% return during that time frame. Even considering the growth the company posts and the expansion of PE multiples in this low interest rate environment – one has to wonder how much further the stock can run before its valuations become problematic. Let's take a look at the fundamental and technical pictures for Home Depot more in depth. What the bulls see in Home Depot… • A 2% dividend yield • Net profit margins of 7.63% that spin off over $6.5 billion in positive levered free cash flow annually • Good management effectiveness metrics: o A return on assets of 16.22% o A return on equity of 58.09% • Reasonable valuation metrics: o An enterprise value of $166.16 billion that easily trumps the stock's market capitalization of $146.56 billion o A price-to-sales ratio of only 1.78 • A healthy short-term balance sheet as evidenced by the current ratio of 1.36 What the bears see in Home Depot… • Some expensive valuation metrics: o A price-to-book ratio of 15.90 o A PE of just under 20 versus estimated revenue and EPS growth of 4.3% and 14.5% respectively • A debt-laden balance sheet: o Total cash of $1.72 billion versus total debt of $17.2 billion o A debt-to-equity ratio of 184.48% Home Depot's technicals… Technicians note that Home Depot may have just completed a very long-term "third wave thrust" to the upside when it peaked out at $117.99 in March. Going back to the inception of HD's trading back in December of 1991, the $115.31 level represented at 138.2% Fibonacci price projection line for this third wave on a monthly chart. The fact that HD traded above that level intra-month and then closed back below that level (for the second month in a row, by the way), lends credibility to the idea of this being a short-term peak for the stock. Technicians feel there are two possible pullback scenarios from here: first, a pullback to around $107 which would then be followed by a move up to the next Fibonacci projection at $131.56; or, a deeper correction down to $91 which would only be followed by a retest of the $115.31 resistance. Much of that may depend on whether the S&P holds support at 2030 (on the futures). Overall… Home Depot is a great company with its fortunes clearly tied (at least directionally) to the general economic environment as well as (inversely) to the direction of interest rates. With one being able to make bullish and bearish arguments in both the valuation and balance sheet areas, the technicals for the stock come to the fore. That being noted, the bulls are likely to be making their first stand at $107. Pay close attention to what happens to HD at that level.