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Good Time to Sell Home Depot

Dow component Home Depot Inc. (HD) reports Q3 2021 earnings in Tuesday’s pre-market, with analysts looking for a profit of $3.38 per-share on $34.87 billion in revenue. If met, earnings-per-share (EPS) will mark a modest improvement over the same quarter in 2020, when the housing boom was gathering strength. The stock sold off 4.9% in August despite beating Q2 top and bottom line estimates but is now trading close to an all-time high.

Supply Disruptions vs. the Housing Boom

The home improvement giant faces skyrocketing wages and supply chain disruptions like other retailers but has done a good job, so far at least, managing those headwinds.  It’s also in the sweet spot, i.e. a prime beneficiary of the millennial surge in home sales. All signs point to a continuation of this trend in 2022 and perhaps longer, depending on the trajectory of the U.S. economy. Even so, the stock has grown extremely expensive, gaining more than 40% year-to-date.

Wells Fargo analyst Zachary Fadem recently noted that Home Depot had grown “increasingly comfortable in the underlying housing backdrop, long-term opportunities via strategic initiatives, and ability to navigate a host of well documented supply chain and inflationary challenges being felt across retail”. However, the stock has now exceeded his long-term target at $365, adding to concerns about valuation.

Wall Street and Technical Outlook

Wall Street consensus stands at an ‘Overweight’ rating based upon 18 ‘Buy’, 3 ‘Overweight’, 12 ‘Hold’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $310 to a Street-high $425 while the stock is set to open Monday’s session about $13 above the median $360 target. This placement reinforces a precarious setup, in which the company may need to exceed quarterly estimates by wide margins to avoid an intermediate downturn.

ANNUNCIO PUBBLICITARIO

Home Depot finally cleared 2018 resistance above 200 in May 2020, lifting to a new high at 292.95 in August. That marked the 2020 peak, ahead of a March 2021 breakout that stalled at 345.69 in May. Another breakout in October ended at 375 near month’s end, giving way to a holding pattern that’s likely to yield a trend move, higher or lower, after the earnings report. Both weekly and monthly relative strength readings have hit extremely overbought levels at the same time, favoring a decline that could reach 350 as a first target.

For a look at today’s economic events, check out our earnings calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

This article was originally posted on FX Empire

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