Why Home Depot Is A Great Stock To Buy

| June 17, 2009 | 0 Comments

I just made a big change in my life… and along with it, I uncovered a great investment idea.

As many of you know, Linda and I started looking for a new home a few months back.  Prices were down.  They’d finally reached a level we thought was reasonable… so we took action.  We started by figuring out where we wanted to live.  Then we narrowed the search down from there.

The options seemed plentiful at first.

Then we realized a sad fact.  Most of the properties on the market were either bank owned or short sales (about to be bank owned).  We were getting a firsthand look at the devastating housing crisis.  Our hearts go out to everyone who has lost their home.

Our biggest requirement was land.

We needed a property with enough space to comfortably house Linda’s three and one-half horses (yes, one of them is pregnant), the dogs, and us.

We finally found the perfect property… the house is a mess.

The roof leaks.  Some of the plumbing is installed wrong.  The electrical job is clearly “home grown”.  The carpets need replacing.  Tile is damaged and cracked.  The bathrooms need to be redone… just like the kitchen.

And that’s just half the story…

It’s been years since the last good cleaning.  A paint job is badly needed.  Many of the doors need replacing.  The fireplace needs work.  An old shed out back is about to fall over.  The landscape watering system leaks like a sieve.  And, all the trees on the property need trimming.  (Wow, that’s a lot of stuff to do!)

So, here’s the question, would you buy this house?

I did.  The land and the location can’t be beat.

Best of all, I got it at a great price.

The property was bank owned – which explains the noticeable lack of maintenance and upkeep.  I won’t bore you with all the details of the closing.  Let’s just say the closing was a miracle.

What I will tell you about is the investment discovery I made.

I was talking with my realtor about the condition of the house when he said something quite surprising, “I’ve seen worse.”

My realtor is a great guy.  He recently started selling bank owned properties.

His stories about these properties are shocking.  Some of the houses for sale are real dives.  The damage and destruction done by frustrated owners is mind boggling.  The neglect from people about to be evicted is glaring.

A lot of these homes are being picked up on the cheap by speculators.

They survey the house, do a quick back of the envelope estimate on repairs, then lowball the bank.  Sometimes they miss out.  But, sometimes they lock in a great deal.

The numbers don’t lie.

Foreclosures in the Phoenix area are down 41% from just three months ago.  Right now, just over 12,000 foreclosure homes are listed for sale.

So where’s the investment idea in all this?

Rest assured, it’s not investing in foreclosed homes.  No cheesy late night infomercial here!  Though, I’ve always liked real estate as an investment.

Here’s a better idea… Home Depot (HD).  Now hear me out.

I started buying Home Depot in my personal account late last year.  I even wrote about it at the time.  Back then the story looked good.  Right now it looks even better.

The decline in foreclosures means many of these houses are being bought up.  And trust me, they all need repairs.  Where do you think all the “do-it-yourself” real estate investors go for supplies – Home Depot, of course.

Now, I’m not expecting business to jump.  But I am expecting them to beat analyst estimates.  How’s this possible?  It’s because research analysts are cutting back estimates.

While analysts slash estimates, I’m looking for the business to get stronger.  Management’s cutting costs, inventories match demand levels, and profitability is the key.

Just look at the announcement from June 10th… just a few days ago:

“Home Depot raises full-year earnings guidance”

I’m guessing I don’t need to explain any further.  That headline says it all.

This is a sign things are getting a little better.  Now, financial numbers for Home Depot aren’t going to be off the charts.  As a matter of fact, the company’s still expecting an overall decline in revenue this year.  But the increase in earnings shows we’ve hit bottom in the industry… and it should start improving from here.

Right now, the company pays a strong dividend with a yield of 3.7%.  The stock is trading just a few points from recent highs set back in April.  If you want to profit from the foreclosure market, take the easy route… buy some Home Depot stock.

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Category: Real Estate

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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