Is Home Depot Silently Killing Your Portfolio?

Investors have been thrilled with Home Depot‘s ( HD -1.41% ) stock performance over five, 10, and 20-plus years. However, the largest home improvement retailer has been weighing down portfolios in 2022, with the stock down 25%. Here are two reasons Home Depot is dragging your portfolio down.

1. Weak guidance for 2022 

While the pandemic slowed many stocks, Home Depot was not one of them. The company produced revenue of $132.1 billion in its fiscal year 2020, ending on Jan. 31, 2021. Comparatively, it did $151.2 billion in revenue in its fiscal year 2021, or roughly 14% growth.

The company didn’t offer specific guidance for 2022 outside of chief financial officer Richard McPhail saying, “Sales growth will be slightly positive in fiscal 2022.” While the pandemic certainly contributed to Home Depot’s higher sales growth, that fiscal 2022 outlook is well below the company’s 10-year compound annual growth rate of about 8%.

A dad and a boy paint a wall.

Image source: Getty Images.

McPhail added that Home Depot’s diluted earnings-per-share (EPS) growth for 2022 would be in the “low single-digit percentage.” For comparison, the company grew diluted EPS from $11.94 in its fiscal 2020 to $15.53 in its fiscal 2021, or about 30%. Again, while Home Depot benefited from the pandemic, its 10-year diluted EPS compound annual growth rate is about 20%.

2. Housing market anxiety

The housing market has been red hot over the past two years, but it could soon be cooling off as mortgage rates continue to rise. Data from the National Association of Realtors shows that February home sales fell 7.2% year over year. Potential new homeowners will face higher monthly mortgage payments and might be more hesitant to purchase a new home when faced with inflation on consumer goods and higher gas prices. 

Still, a lackluster housing market doesn’t necessarily affect the sales of home improvement goods. On the most recent earnings call for its competitor Lowe’s ( LOW -1.00% ), CEO Marvin Ellison said, “Historical trends will show convincingly that high interest rates, combined with other positive macro indicators, do not have a negative impact on home improvement.”

Why Home Depot could bounce back

With slowing sales growth and possible anxiety around the housing market, Home Depot’s stock has dipped near a 52-week low. And it is trading at a price-to-earnings (P/E) ratio of roughly 19.5. Over the past five years, it has had an average P/E of 22.4. 

Home Depot is a prominent dividend stock, and its current quarterly payout is $1.90 per share, with a dividend yield of 2.5%. Moreover, the company will likely continue to raise its dividend, as it has done each year since the 2008 crash.

The Foolish bottom line

It never feels good when a stock you own is down 25%, especially a blue chip like Home Depot. While there are some short-term concerns, the company’s dominance as the top home improvement retailer won’t be changing anytime soon. Moreover, according to the 2020 American Community Survey, only 6.2% of the U.S. housing stock has been built since 2010, which could bode well when repair or renovation time comes for homeowners.

Look to Home Depot’s next earnings report to see whether higher interest rates genuinely have little to no effect on the company’s sales. Additionally, if 2022’s sales outlook improves, look for Home Depot to regain its status as one of the most dependable stocks in your portfolio. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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