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Can a few quick moves revive a stock?
Not in the case of Home Depot (HD, news, msgs). Embattled CEO Robert Nardelli resigned nearly a month ago, and the company recently announced plans to hire more sales associates for its stores. But little has changed for investors.
For one thing, the company's management change wasn't radical enough. The board didn't go outside the company to find a person with years of retailing experience -- it elevated Frank Blake, a Nardelli hire and another former General Electric (GE, news, msgs) man. Though Blake will try to put his own stamp on the company, he was behind many of the moves that investors have questioned, most notably the move into construction supply. What Home Depot needed was a leader who understands retail and the customer experience. Blake isn't that man.
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Maybe that's why the stock hasn't made much headway. It's possible Blake will prove the skeptics wrong by improving customer service, inventory management and store appeal, but there is nothing in his past to suggest that he possesses the skill set to accomplish those tasks.
There's no reason to invest your money on the hope that he will succeed.
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Wall Street wisdom
Could an improvement in the housing sector jump-start the stock? In theory, that's possible, even probable. Of course, the housing sector would have to bottom out and then start to improve for that to happen. Though such a scenario may be the prevailing wisdom on Wall Street, I don't buy it, and neither should you.Drive around your neighborhood and look at all the houses for sale. How many of them have been on the market for more than six months? The prices likely already have come down at least once, and yet the houses still sit there. Inventory of unsold homes remains very high, but home builders remain determined to build almost as many homes over the next 12 months as they did last year. In other words, don't expect the supply overhang to go away anytime soon.
Though interest rates have dipped a bit, demand for housing isn't going to return to the levels of two years ago or even early last year. The economy is slowing, speculators are long gone, and other investments, such as the stock market, are providing better rates of return.
Those of you who have followed my columns over the past several months also know that I don't expect rates to help out much. For the home-improvement business to improve, rates need to drop to the point that consumers refinance, remodel and/or relocate. That's unlikely at a time when government deficits are climbing and the dollar's value is deteriorating. Long-term interest rates won't come down much, if at all, and they may well start to move higher.
Though Home Depot has tried to convince investors that the decision to expand into the low-margin, highly fractured construction-supply space will insulate it from the cyclical home improvement business, both are directly tied to interest rates. Meanwhile, Home Depot is diluting its margins, increasing its expenditures and losing its focus. I think it's what investing guru Peter Lynch called "diworsification."
Home Depot's stock has rebounded some 22% off its summer lows amid hopes that a bottom in the real estate market would translate into improved performance. Now you can't even make a compelling valuation argument for buying the stock at current levels. Home Depot currently sells at 14 times next year's estimated earnings of $2.88 per share. That might seem cheap until you realize that earnings over the next year are expected to climb by a scant 1.4%. By comparison, Lowe's (LOW, news, msgs) trades at 15.8 times estimated earnings, with a growth rate of nearly 5%.
At the time of publication, Robert Walberg did not own or control shares of any company mentioned in this article.
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