Yesterday afternoon Home Depot (HD) released a statement regarding a data breach, but offering little information as to the scale, causing a 3% decline in the stock in a matter of minutes:
As the chart above shows, the stock made back a portion of the declines, and seemingly stabilized, but it is important to remember that the stock has had a massive move of late, recently breaking out above the 1yr range,making new all time highs this past Friday. Yesterday’s decline is notable because it is on huge volume (the largest volume day since February 2013) and from a high:
While some media reports have suggested that the credit card breach may not be anywhere near that of Target’s (TGT) from late last year, it is important to draw the distinction between the sentiment of the two retailers leading up to the company’s acknowledgement of the breach. For instance, when TGT made their Dec 19th statement on the breach that occurred between Nov 27th and December 15th, the company had just reported disappointing Q3 earnings and gave a downbeat outlook for Holiday sales. From the date of the company’s initial statement, TGT declined 14% from Dec 18th to February 5th, before putting in a bottom. It is also important to note that in the weeks after the announcement, the stock actually made a new high, before the subsequent decline, suggesting that investors initially underestimated the potential severity of the breach:
The selling in the stock in January was incessant, and it was clear that investors were shooting first and asking questions later. I suspect that HD is likely to weather the storm a tad bit better than TGT did, largely because the sentiment is a a whole heck of a lot better, both from an investor standpoint, but also from a consumer standpoint.
I would conclude with one last point as it relates to HD. The stock has had a very nice run, the technical breakout last month is a thing of a beauty, and I think it is safe to say that the $84 breakout level should serve as VERY good technical support for the foreseeable future, and likely a very good entry point on the long side if in fact the stock faces a bout of selling similar to TGT earlier in the year. For those who have nice gains in HD and think that yesterday’s initial move might have been a bit muted, implied volatility remains fairly cheap at just a couple ticks off of multi-year lows. As a result, it’s not a bad spot to add short term protection to stay in the investment, or possibly consider stock replacement strategies: