Prepare to Buy an Industry Leader on an Earnings Drop

While the stock market has fared well so far this year, investors have been more cautious going into earnings. And most companies have reported a slowdown, but overall it hasn’t been as bad as expected.

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  • The wild card is the housing market. Rising interest rates and fewer homeowners looking to sell are creating a tight market, but one where prices could potentially drop. In that environment, homeowners may slow down home maintenance or improvements.

    That’s the fear going into earnings for big box home improvement stores like Home Depot (HD), which reports earnings this morning. It’s a reversal from the pandemic era, when homeowners with more time around the house found more projects to complete.

    In the short-term, the market may sell off on fear. But with shares already near six-month lows, long-term investors may want to buy shares on a selloff. Home Depot is reasonably valued at 18 times earnings, and will likely be able to continue its long-term growth despite any short-term headwinds.

    Action to take: Investors should look to buy on any drop, and add shares when in the $270 range or lower. At current prices, shares yield about 2.9 percent, and could easily top 3 percent on a drop.

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  • For traders, look for shares to take a quick hit and then likely recover in the coming weeks. The September $320 calls, last going for about $6.65, can likely be bought a bit more cheaply following a drop, and can then deliver mid-double-digit returns or higher on a rebound.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.