Tuesday Morning
The economist/trader/investor/writer/NCO is possibly the scarcest of creatures. This one woke up with no power at zero-dark thirty. This is after all, Long Island, and it did drizzle last night... so of course. No TV. No radio (one battery short, I know...unprepared), and worst of all... no coffee. The writer did however, have a laptop that would last a couple of hours, and a whole ton of infantry training both as a young man, and an old one as well. Market Recon made deadline. PSEG Long Island promised power at 08:30 pm. They delivered just before 14:00. That's almost early in their world.
That's not why I tell you my tale. I tell this tale because, in my physical stupor, I left my bathroom faucet running at 04:30. The sink I shave in, the sink that I already knew had a problem. Yes, that was careless. My son, up at 5 am for work, finds a flood in the bathroom. The floor is cheap linoleum. No problem. The room below that bathroom is the den. Plenty of damage, but stuff most normal men can do. Nothing requiring a pro. If one can put up sheet rock, tape it, sand it and paint it, one is all set... after a trip to either Home Depot (HD) or Lowe's (LOW) . That's a matter of personal preference. Oh, by the way, Home Depot reported this morning, and Lowe's reports tomorrow.
Home Depot
For the second quarter, Home Depot posted EPS of $4.02. This was not only a serious beat, this was growth of 27%. Revenue? Kapow! $38.05 billion, beating expectations by almost $3.5 billion! Growth of 23.4%, way beyond anything this firm has done recently. Oh, FYI... Comp sales printed up 23.4% (+25% in the U.S.). Wall Street? Looking for 10.9%. What the? What a quarter. No, wait, I want to really write it like I'm fired up, so you get it. WHAT A QUARTER!
Check this out. Gross margin? Up. Inventories? Down. Sales per retail square foot? Up. Yes, this is the year 2020. Total customer transactions and average ticket prices both soared. Huzzah! Just one thing. Operating margin remained flat. How is that? Well, not too hard to figure out. Expenses are up year over year. The firm spent $480 million on additional compensation for employees, which included weekly bonuses for hourly labor. The firm also spent $110 million making the stores safer for both employees and customers.
So, if the quarter was so good, why is the stock trading lower today? Good question. First off, if one were to buy these shares late Tuesday afternoon, down 1.16% for the day, that investor would still be paying more than a comparable investor who paid the high on any day other than Monday.
The reason the shares are selling off (mildly, I might add) is straight forward. The company bluntly told investors this morning that they could not extrapolate the fantastic second quarter for the balance of this fiscal year. That makes sense. Fiscal support for the average homeowner, as well as unemployed persons has been left in limbo by a House of Representatives that went into recess on July 31st, and a Senate that did likewise a couple of weeks later. The funds provided in previous rounds of stimulus/support obviously had a positive impact on sales for certain retailers. Due to the uncertainties created around the novel coronavirus itself, as well as the fiscal situation that has become an overt political football ahead of the presidential election, the firm is unable to provide any forecast for the remainder of the year. Home Depot suspended guidance back in May.
The Chart
The shares appear to be severely overbought. Technically. That actually puts HD in some pretty good company these days. What I want you to see is the $259 pivot created by the cup with handle this past spring. That created a slow move higher that really can not be called a break-out. What it can do, if support is found up here, would be to provide a technical target price of roughly $310.
The other side of the coin? The shares come in a bit in search of that support and close back in on that pivot, which also happens to now be the 50 day SMA (meaning that it could be likely that this spot has been identified by a number of algorithms as significant). I am not in HD right now, but the name has been good to me in the past. This is my actual homework, and this is what I am thinking.
Trade Idea (minimal lots)
- Purchase 100 shares of HD at or close to the last sale of $285.90.
- Sell (write) one HD November $310 call for about $6.50
Net basis: $279.40
Optional, But Riskier Add-On (still minimal lots)
- Sell (write) one HD November $250 put for roughly $5.65.
Note: This knocks the net basis down to $273.75, but opens the door to discounted post-election equity risk. Worst case? This trader would wind up long 200 shares with a net basis of $261.88, and the shares trading below $250 in mid-November.
