MorningWord 8/20/13: $HD Brilliant Results, As Good As It Gets For Now?

by Dan August 20, 2013 9:14 am • Commentary

Morning Word 8/20/13:  As Q2 earnings season has been winding down over the last week or so, with more than 90% of the S&P 500 companies having reported, it has been the retail stragglers of late that might have put an explanation point on what could only been labeled as lackluster period with murky guidance, until today?

HD just announced Q2 earnings that beat street expectations and raised earnings and revenue guidance for the balance of the year.   While the results were impressive in an fairly difficult retail environment, the guidance bump, while above their prior guidance, was basically inline with the Street’s consensus.  The company bought back stock at a fairly staggering pace, $4.3 billion worth in the first half of the year and they see an additional $2.2 billion in the back half of 2013.  (press release here, conference call starts at 9am).  The stock is trading up 3.5% in the pre-market, vs the implied one day move in the options market of about 3.5%.   Not to put too fine a point on this one, but HD’s ability to hold these early gains may be a very important “Tell” for the whether or not the SPX’s 3.7% sell off from the Aug 2nd all time highs will turn into a deeper decline, or was nearly just the next great dip to buy in a year that has seen a series of great  dips to buy.   Last week I wrote a post (here) detailing the diverging price action of the components of the XHB, focussing specifically on the very poor relative strength of the actual homebuilders in the index vs the outperformance of the retail components like HD and LOW.  At the time I highlighted the fact that HD did not make a new high with the SPX on Aug 2nd, it that it might be running out of steam, but either way, the chart was at a fairly important technical level in front of what would be a pivotal earnings report with the stock just a few % from the all time highs.  As stated above the report looks solid, and now it comes down to a very difficult to predict input, investor sentiment.

The one year chart below shows what could be a double top from the May and July highs, the inability to make a new high with the SPX in early Aug, despite being one of the pillars of the ytd rally, the recent break of the uptrend that has been in place since last fall, and the stocks close last night right on important near term support at $75.



It is clear by HD’s results and confidence about their visibility for the balance of the year that the company is not only executing well, but in a fairly sweet spot as it relates to consumers wallets.  Today’s price action in the stock will be more telling as to whether or not investors the HD story as a sort of “as good as it gets” trading at a valuation measured by its P/E very near the 10 year high.  The increased volatility in the homebuilding stocks of late, and the fact that they could not hold last Thursday’s reversal leads me to believe that the potential for the winners to be dragged down with the losers could continue for a bit longer.