Home Depot Leads This Hot Index Near Buy Point After 146% Run

Home Depot stock and other building-related plays remain solid as the economy recovers from the Covid-19 pandemic.


One way to gain exposure to the hot industry — invest in a sector fund such as SPDR S&P Homebuilders ETF (XHB). The $2.1 billion fund offers exposure to the homebuilders segment of the S&P Total Market Index. But it isn’t a pure-play in homebuilding.

Less than a third of total assets are in homebuilding stocks. In fact, the biggest sector weight recently (nearly 39%) was in building products stocks such as security, kitchen and bath products company Fortune Brands Home & Security (FBHS). Also, Masco (MAS), which sells cabinets, plumbing and other supplies, and building materials supplier Owens Corning (OC).

Homebuilding was the second largest at 32%, home improvement stores 11% and home furnishing retail 9%. Home furnishing products and household appliances made up the rest.

Dow Jones Stock In Top 10

Upscale furnishing sellers RH (RH) and Williams-Sonoma (WSM) lead top 10 holdings, which represent 40% of the 35-stock portfolio. Dow stock Home Depot (HD), PulteGroup (PHM), D.R. Horton (DHI), Toll Bros. (TOLL), Fortune Brands and Owens Corning also made the top 10.

Williams-Sonoma has rallied 68% year to date through Thursday’s close. It’s well extended from a 151.26 buy point of a cup base cleared in March, according to IBD MarketSmith chart analysis. A 98 Composite Rating puts it among the leaders in the 18-stock home furnishing retail group.

A 96 Earnings Per Share Rating reflects triple-digit profit growth in three of the past four quarters. Companies across most industries saw losses last year due to Covid-19 pandemic shutdowns. But Williams-Sonoma’s EPS soared 87% in 202o as people spent more money sprucing up their homes.

Late Wednesday, the company reported April 30-ended fiscal Q1 results that beat targets and raised its guidance, amid continued strong demand for home furnishings.

“As reopenings accelerate across the country, a record number of customers continue to shop with us as they invest in their homes,” CEO Laura Alber said on the earnings call.

Similarly, RH (97 Composite), with a 95 EPS Rating, posted 53% higher profit for the fiscal year ended in January. RH stock has advanced 44% this year. It’s far extended from a 410.59 buy point and several pullbacks to its 10-week moving average.

Home Depot Stock Finds Support

Home Depot stock (86 Composite) is up 20% this year. It boasts a 94 EPS Rating, but a 59 Relative Strength Rating leaves plenty of room for improvement. The Atlanta-based retail giant has knocked out steady profit and sales growth the past 11 years. EPS and sales grew a respective 17% and 20% in fiscal 2021, which ended in January.

On May 18, Home Depot easily beat Q1 estimates as renovations and construction continue to boom amid rising costs of raw materials such as lumber and steel.

“We continue to effectively manage the outsize demand for home improvement products seen throughout most of last year despite disruptions in global supply chains that were further exasperated by port congestion during the quarter,” CEO Craig Menear said on the earnings call.

Shares rallied 146% from its March 2020 low to its mid-May high. Home Depot stock has since pulled back to its 10-week line for the first time since a March 2021 breakout.

XHB provides access to these three stocks and much, much more. The ETF, up 30% this year going into Friday, is easily beating the broader market’s 12% return, as tracked by the S&P 500. It’s pulled back from a May 10 high but is finding support at the 10-week moving average.

That sets up a chance for investors to buy or add shares as they rebound off the line. XHB charges a 0.35% expense ratio.

Follow Nancy Gondo on Twitter at @IBD_NGondo


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