To The Moon

$Home Depot(HD)$

When I look back at the last two articles I wrote on Home Depot, I had a neutral rating. I use “neutral” instead of “hold,” since I didn’t own the stock myself. The most recent of those articles was written almost exactly three years ago, so I thought it’d be interesting to revisit my conclusion from back then.

At the time, I wrote that a lot would depend on whether or not we entered a bear market or recession. I believed the odds of a recession were high, and my base-case expectation was that the stock could fall another 30–35% over the next few years.

As it turned out, we didn’t really have a recession. Some argue that 2022 counted—since we had two quarters of negative GDP growth—but I didn’t consider that a real recession. I think we narrowly avoided one, thanks in part to stimulus measures from the Biden administration, like the student loan payment pause and other support.

As for the stock, it ended up declining only around 10% from that point, nowhere near the 30% drop I had projected. But again, we didn’t get a full-blown recession either. I also noted that if the stock fell 50%, I’d probably become a buyer. And I said that while Home Depot didn’t appear much more overvalued than the broader market, its future returns wouldn’t be spectacular without a recession. That’s why I rated it a “hold.”

Looking back, I think that was a fair take. Let’s check the numbers.

Since then—about three years ago—with dividends included, Home Depot is up 28%. Meanwhile, the S&P 500 is up 42%. So, while it’s underperformed the index, an investor still would’ve made about 8% annually including dividends—not a bad result. That “hold” rating seems to have been the right call.

Cyclicality Check: How Risky Are HD’s Earnings?

Home Depot is not a high-beta, boom-bust business — but it is still cyclical. Its earnings are sensitive to interest rates, housing activity, consumer sentiment, and construction volumes. During the 2008 financial crisis, earnings fell by roughly 45%, a clear sign that it is not recession-proof. That level of downside earns it a “moderately cyclical” label in my framework — not as volatile as automakers or commodity stocks, but not a defensive consumer staple either.

During COVID, Home Depot actually saw a surge in demand as housing activity boomed and DIY spending exploded. But that tailwind has since normalized. Recent quarters have shown pressure on same-store sales, and growth is expected to be flat in 2024 before a modest rebound in 2025.

The key takeaway: earnings are resilient over time, but not immune to economic cycles. That’s crucial context when selecting the right valuation method.

Shifting to a More Bearish Outlook

This time around, I’m going to lean a bit more bearish when we get to the valuation section. But first, let’s look at the historical earnings cyclical, which I always like to start with.

On the FAST Graph, the dark green shaded area represents earnings. Let’s zoom out to before the pandemic and focus on the Great Recession, which had a direct impact on Home Depot, Lowe’s, and other housing-related businesses.

Home Depot, as most of you know, is a big-box retailer focused on home improvement supplies, similar to Lowe’s and Menard’s. During the Great Recession, earnings fell around 45%. That’s a decent drop, but not catastrophic. I’d classify Home Depot as moderately cyclical—sensitive to housing and construction, but not as volatile as semiconductors or oil stocks.

Going back even further, their earnings growth had been steady, and even in the worst of times, earnings didn’t decline more than 50%. So I feel comfortable using an earnings-based valuation approach here. If this were a highly cyclical business—where earnings fall 50% in a single year and rebound the next—I wouldn’t use this method. But it works for Home Depot.

A Look at the Last 10 Years

Let’s take a look at a 10-year window. Keep in mind, this period doesn’t include a true recession, which is important for context. We are seeing some post-COVID softness, but I wouldn’t call it a full downturn.

Over the last 10 years, Home Depot’s earnings have grown very well, but a big driver of that has been share buybacks. While you don’t see the full impact , the company has bought back around 22% of its shares over the past decade, which has boosted earnings per share artificially.

Buybacks are fine—especially when the stock is cheap—but they stopped buying shares in 2020 during the COVID dip and again in 2024, likely due to valuation concerns.

Once I adjust for buybacks, my calculated earnings growth rate is about 8% annually, compared to FAST Graphs' 10.76%. I think 8% is more realistic going forward. Analyst projections also show 9–10% earnings growth after this year’s expected decline, which aligns pretty well with my estimate.

Valuation & Payback Time Analysis

This year, they’re expected to earn around $15 per share. The current PE ratio is about 24–25x. So the earnings yield is around 4.12%, according to FAST Graphs. But I adjust for net debt to get a more complete picture.

Home Depot’s enterprise value is about 17% higher than its market cap—so I bump up the effective “price” by 17% to account for that. That brings the earnings yield down to around 3.49%.

I then apply a time-until-payback model. If I were to buy the business at this adjusted price, and assume $15 in earnings growing at 8% per year, I want to know: how many years would it take to earn back my investment in cash flow?

The answer is: 15 years.

That’s right at my sell threshold. It’s not terrible, but it’s also not compelling—especially when we're assuming no recession and optimistic earnings growth.

Conclusion

So after holding a neutral stance on Home Depot since 2019, I think now is the time to start reducing exposure. If I owned the stock, I’d probably sell at least half and consider exiting the rest when it makes sense from a tax standpoint. It’s not a panic situation—but rather a strategic reduction.

The company hasn’t recently shown they can sustain 8% EPS growth. Much of the past growth was boosted by tax cuts (in 2018) and stimulus (in 2020–21). Without those tailwinds, the recent trend shows flat or declining earnings.

Also, since they’ve stopped buybacks, future EPS will better reflect actual business growth—which I suspect will be modest at best.

To be clear, I don’t think there’s a huge downside risk here. It’s not a stock that’s going to crash. Most investors who bought before the 2020 boom are still sitting on gains. But I don’t see much upside either. Most of the optimism is already priced in, and there are probably better opportunities elsewhere.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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