Economists may have been surprised by the rise in inflation in August because they were primarily looking at sharply falling energy costs. But consumers knew it still cost them more to put food on the table and buy clothes, cars and medicines. So-called core costs rose nearly 7% for the month and grocery costs rose 11.4%, the biggest 12-month rise since 1979.
The stock market reacted to the news as expected Dow Jones industry average Crash 1,300 points or 4% and die S&P500 lost a similar percentage, with only five stocks in the popular index ending in positive territory.
home depot (HD 1.63%), which ranks in both the Dow and S&P indexes, subsequently plummeted 6.5% as the likelihood increases that the Federal Reserve will hike interest rates by at least another 75 basis points if they later tighten meets this month. We could be heading for an official recession.
According to a survey by small business network specialist Alignable, housing starts are down 14.4% in the last month, mortgage rates topped 6% and 63% of small businesses are stopping hiring.
It’s certainly a bleak prospect, which may have investors wondering whether to hold off on buying shares in the hardware store. Still, there are some very good reasons to think this could be a good time to buy Home Depot.
Beat near home
A slowing economy would certainly hit Home Depot as well as other retailers, as consumers prioritize spending on essentials over luxuries. Building an addition to a home might be postponed until better times, and even now, amid the snarling of the supply chain, finding supplies and materials wasn’t easy.
About 90% of Home Depot’s business comes from the housing market, either directly from DIY homeowners or indirectly through professional contractors. Contractors alone account for 45% of Home Depot’s total revenue, making the company much more dependent on them than its competitors loweswhere they only account for 20% to 25% of sales.
Building for the future
And yet the housing market has so far remained frighteningly resilient. Despite inflation, high energy costs, supply chain disruptions and more, property prices have not plummeted. This is because there is still high demand for homes but low supply of them.
CNBC reports that housing supply was up 27% in early September, but inventory is still 43% below where it was in 2019. There will come a time when equilibrium is reached, but we’re not quite there yet I will keep the home centers active for some time.
And when people aren’t buying new homes, they’re choosing to renovate the ones they already have, as they did at the start of the pandemic. They also take care of the exterior of their homes, which leads to more sales of garden tools and supplies, as well as paint. Indoor and outdoor gardening accounts for over 17% of Home Depot’s total sales, the largest segment of all, while paints account for another 7%.
Home Depot (and Lowe’s, for that matter) isn’t recession-proof, but it has a resilience of its own.
Share profits with shareholders
And then there’s Home Depot’s dividend to sweeten the deal. It’s been paid out to investors every year for the past 35 years, and the dividend currently yields 2.7% annually.
Dividend stocks have historically fared better than non-paying stocks. While a dividend payout will rarely be enough to offset a decline in capital appreciation, having a company continue to share a percentage of its earnings is a vote of confidence for the future to discourage investors from jumping ahead of the curve.
And that’s why Home Depot is a buy, even if investors don’t hit the exact bottom. You never know when the markets will reverse course. Over the past 20 years, the stock market has risen an average of 9.5% annually, but if you missed the 10 best days in the market, your returns would almost halve to 5.3% per year.
Time in the market is more important than market timing, and Home Depot has proven to be a solid performer over time. Wall Street still expects 16% annual earnings growth, so the 2022 stock haircut should be a good time to buy its shares.