The Home Depot (HD) has been one of those stocks that holds a special place in investors hearts over the last few years, gaining 350% from its 2011 lows, and tripling the performance of the S&P 500 (SPX) off its 2009 financial crisis lows:
The company has been one the largest corporate beneficiaries of the U.S Federal Reserve’s unprecedented monetary policy since the crash of the real estate market last decade. But here is the thing, almost every Fed induced bubble is kind of coming apart. And given the horrible poor performance of homebuilding stocks of late (the XHB, the S&P Homebuilders etf is down 25% from its 52 week highs and the ITB, iShares Home Construction etf is down 21% from its 52 week highs), I am hard pressed to think that HD can continue to defy gravity as other sectors in the U.S. that are economically sensitive like autos and transports implode. Yeah the stock has bucked all of the prior headfakes lower of the last few years, but the broad based weakness in almost every sector in the S&P 500 except for defensive sectors like Utilities, Telco and Consumer staples leads me to believe the jig is near up for U.S. stocks.
HD buys back a ton of their own stock, pays a dividend which yields 1.88%, exactly what the 10 year Treasury gives you, trades at 23.4x expected 2016 eps growth of 17%, despite a mere 6% revenue growth. The stock is expensive to retail peers and the broad market, and if the company were to guide the current year down, the stock could see a re-rating.
The next identifiable event will be fiscal Q4 results on Feb 23rd.
Since Jan 20th, the stock has rallied 10% from its intra-day low, but has stalled at resistance, right at its late November breakout level in the mid $120s:
So what’s the trade? I want to make a defined risk bearish bet into HD’s Q4 results targeting a 10% move back to the stock’s Jan lows.
*Trade: $HD ($125.60) Buy Feb 26th weekly 125/115 Put Spread for $2.30
- Buy to open 1 Feb 26th weekly 125 put for $3
- Sell to open 1 Feb 26th weekly 115 put at 70 cents
Break-Even on Feb 26th weekly Expiration:
Profits: between $122.70 and $115 of up to 7.70, max gain of $7.70 at $115 or lower
Losses: between $122.70 and $125 of up to $2.30, max loss of $2.30 above $125
Rationale: This trade risks less than 2% of the underlying stock price with potential gains of 3x what’s at risk. It’s a near the money, risk reward event trade. This trade isolates the earnings event with the choice of weekly options. A lot can happen between now and the the event so we will keep a stop on the trade to the upside so that it doesn’t become too far out-of-the-money and won’t be afraid to take off for a profit below before earnings if broader market weakness drags the stock lower in the meantime.