Home Depot better left for dead

Perhaps David Batchelder, a director of Home Depot, was inspired by the Easter theme of the resurrection when he decided earlier this week to spend more than $28 million to purchase 1.1 million shares of the home improvement retailer's stock. Batchelder now owns 1.9% of Home Depot.  Not surprisingly news of the transaction sent shares of the beleaguered retailer sharply higher in Thursday's trading.

But should you follow the lead of this insider and start accumulating Home Depot stock?  Investors often perceive insider buying as a strong (re)entry signal for beaten down stocks.  Home Depot definitely fits that description, as the company has seen its share price tumble by 27% over the past year. Nevertheless, there is no reason to hurry back into the stock -- despite the bold action taken by Mr. Batchelder.

First of all, the housing market isn't getting any better as evidenced by the weakness in the most recent housing starts data. Fewer homes being built means less commercial business for granite countertops, kitchen cabinets, floor tile, etc.  Meanwhile, the lifeblood of home remodeling projects -- home equity loans -- are increasingly difficult to come by these days. Toss in the slumping economy and reduced consumer spending into the mix and it's safe to assume that the pace of remodeling efforts will remain slow for the balance of 2008 and into 2009.

Not only does the macro picture continue to look bleak, but Home Depot is still smarting from its lack of satisfactory customer service -- a problem which has plagued the company for years and sent once loyal customers to competitors such as Lowes. You might get away with mediocre customer service during boom times, but when conditions get tough such problems really begin to make a difference when it comes to market share.  Note that Home Depot's projected that sales in fiscal 2008 would decline by as much as 5% versus a modest gain for Lowes.

So what if macro conditions remain lousy and the company continues to lose share to Lowes -- that's old news you say.  Already in the price of the stock, which is why Mr. Batchelder is taking advantage of the cheap price to load up on the stock. That might be a decent argument for buying if it were true, but it's not. Despite its problems Home Depot trades at a premium to its industry and the market - even though earnings are projected to grow at a slower rate in the future. Based on its growth prospects the stock doesn't look fairly (not to mention cheaply) priced until it hits the $21-$20 area. 

As far as I'm concerned, the insiders can buy all they want because Home Depot remains dead to me.

(Disclosure: If it isn't obvious, I don't own Home Depot stock. I don't own shares of any other company mentioned in this post.)

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Comments

 

I worked for lowes for ten years and would love to go back as soon as I move back east. Lowe's takes very good care of their employees, and that translates into better customer service. The first store I worked for had 90% tenured employees (some having been around since they had opened over 30 years ago!!) who loved their jobs. I started as an 18 yr old seasonal employee and enjoyed the work so much that even after college I stayed on, as their benefits packages and pay once you started moving to management levels is very competitive. I know that my store put a HUGE emphasis on customer service. The company runs customer service incentive programs that we won every quarter, which translated into hundreds of dollars in bonuses each quarter, a grand on top of that each year, and then drawings for vehicles at all the top stores. The Lowe's I worked for used the company wide training programs for every single employee, so even if you couldnt build a whole house yourself, you could at least help a majority of the customers with solid basic knowledge about almost all of our products. There was also a huge emphasis on cleanliness and shopability of our aisles, as well as merchandising strategies that we employed everyday to maximize sales. And that was just the basics!

I had friends who had worked for the HD next door and they HATED it. They were paid peanuts, they had management who werent invested in their jobs, the bare minimum benefits, and no workable structure in their stores.

Mary (Posted 09.05.09 8:22 PM) Report Abuse

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