Editors Note:

We hear lots of tragic stories about damage and destruction from hurricanes but there are ways to profit from it. A destructive hurricane is a windfall for Home Depot. They supply the wood, lumber, sheetrock, paint, etc to rebuild after a disaster.


HD - Home Depot - Company Profile

The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, and lawn and garden products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself (DIY), do-it-for-me (DIFM), and professional customers. The company offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its DIFM customers through third-party installers. It primarily serves home owners; and renovators/remodelers, general contractors, repairmen, installers, small business owners, and tradesmen. The company also sells its products through online. As of December 31, 2015, it had 2,274 stores. Company description from FinViz.com

Home Depot is insulated from the Amazon competition. You cannot buy 2x4 boards, carpet or a 5-gallon bucket of stain on Amazon. With the housing recovery in full swing, Home Depot has been fueling a massive remodeling binge. Customers trying to spruce up their homes so they can sell, go to Home Depot for the supplies. Customers that have just bought a home shop at Home Depot for items to remodel to fit their tastes. Customers just remodeling their own home to bring it up to date shop there as well. Home Depot now has online ordering with shipping to you on the smaller items or in store pickup for larger items. About 42% of online orders are now picked up in local stores. That also provides an opportunity to sell the customer something else as he wanders around the store. I am living proof that you cannot go into a Home Depot without buying something.

Same store sales have risen 4% or more in 15 of the last 16 quarters. In an interview with the CFO she said property managers were 3% of their customers but 40% of sales. That is an amazing statistic because once those professional managers are locked into a supplier like Home Depot they rarely change. The only other comparable big box is Lowes and they are always more expensive.

The CFO said the addressable market for their products in the U.S. is $550 billon and Home Depot only has 20% of that market. There is plenty of opportunity for additional growth. More than 50% of U.S. homes are over 40 years old. The company is targeting $100 billion in annual revenue in 2018.

Home Depot has bought back $2.6 billion in stock in 2016 with $2.4 billion to go. Their capital spending plans called for $5 billion for stock purchases. The company will also pay $3.4 billion in dividends. They have not added a new store in the U.S. in more than three years. They are using the expansion money to remodel one-third of each store every year. These "resets" are critical to keeping the stores fresh and implementing new marketing strategies.

Since Hurricane Matthew hugged the coast and caused damage in multiple states, Home Depot is going to have a very strong Q4. They actually have a hurricane response team that loads up trucks with building materials like plywood ahead of the storm and generators for businesses to continue to operate after the storm. They load the trucks and send them to the potential impact areas before the storm actually hits. Once the storm does hit they immediately send more trucks loaded with the supplies normally in demand after a storm. Before the winds actually quit blowing they have trucks pulling into the local stores with the needed inventory.

Home Depot has turned storm watching into a profit center and they do a very good job. This will have only a minimal impact on Q3 earnings but the guidance for Q4 should be strong.

Earnings Nov 15th.

Earnings are the week of the November option expiration so I am using the December strikes to preserve speculation premium. Shares are hovering just above support at $126 and normally rally into earnings and decline afterwards. Because of the expectations for strong guidance I am not planning on exiting before the earnings. We will exit afterwards and probably reload with a February option to capitalize on the January earnings for Q4.

Shares have declined since the early September period and have found support at the $125 level for the last six weeks. HD normally has a pre earnings run and it could start any time now, market permitting.

Because of the market instability I am putting an entry trigger on the position.

With a HD trade at $127.50

Buy Dec $130 call, currently $1.91, initial stop loss $123.85.


No New Bearish Plays