2 Reasons To Avoid Home Depot
With new cases of the coronavirus spiking in the US and worldwide .
With the already historic unemployment levels and job losses in recent months .
And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.
There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.
The key to continue compounding your investments and build wealth is to keep investing well over time.
Most people think the number one way to do that is to invest in assets that will grow your capital over time.
And this is huge part of things.
But another huge part of this is also losing as little capital as possible.
The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.
Both things are necessary to build wealth. But most only think of investing well.
Today I want to talk about the second part of things that few consider… Staying away from investments where you’ve got a high probability of losing money in.
Last week I showed you 2 Reasons To Avoid Lowe’s…
Today, I want to show you 2 Reasons To Avoid Home Depot.
2 Reasons To Avoid Home Depot
- It’s Overvalued
As of this writing Home Depot (HD) is a $308.4 billion market cap home improvement store.
From January 1st, 2020 to today its stock is up 30.5% this year…. From $219.66 on January 2nd, 2020 to $286.75 per share as of this writing.
And it’s up 88.5% from its low in March 2020 when the coronavirus pandemic first hit… From $152.15 per share to $286.75 as of this writing.
This is a wild ride this year for Home Depot stock. And it leads to the company being overvalued now.
Its P/E is 22.9.
Its P/CF is 15.5.
And its forward P/E is 25.6.
On all these metrics I look to buy investments below 20 to consider them for investment.
Home Depot is above these numbers on average which means its overvalued.
And this means investing in its stock today gives you no margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning its stock in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
This lack of a margin of safety is the category Home Depot falls into right now.
Its stock is up so much mainly because…
- Its continued performing well during this crisis so far and should continue doing so.
This is because more people are stuck at home so they’re doing more home improvement projects.
And this led to fantastic earnings the company just released on August 18th, 2020.
This is great of course for Home Depot and its shareholders…
But there’s also something else that lowers the margin of safety for Home Depot and makes it riskier…
2. It’s Got A Lot Of Debt
As of the most recent quarter Home Depot’s balance sheet is made up of 105.9% of total liabilities.
In other words, after subtracting total liabilities from total assets there’s a negative number. This means after subtracting debt from assets that the stocks equity – the shares you buy on the market – are worth less than $0.
It’s also why I can’t tell you what its debt/equity ratio is like I normally do in these articles. Because there’s no equity left over after subtracting debt.
This is rare when you see this at an operating company. But it’s horrible.
And in terms of absolute dollar numbers it has $41.8 billion in short term and long-term debt and capital leases.
I want to invest in safe stocks that will be around for decades to come to help me build wealth over the long term. This helps insure I lose as little money as possible over time.
Typically, this means I invest in companies that have little to no debt compared to their cash and equity.
And in most cases I want to invest in stocks that have debt to equity ratios below 1.
Home Depot does produce enormous profits and cash flows which allows it to sustain and support this debt.
But the large debt does make me uncomfortable… Especially with the enormous uncertainty related to the coronavirus.
Just because it’s doing well so far in this pandemic doesn’t mean it will continue performing well going forward.
And its debt lowers the margin of safety even more with Home Depot stock.
None of this means I think Home Depot will crash and burn…
I think Home Depot will continue performing well and increasing its dividend payouts.
But due to its overvaluation you won’t earn as high of returns as you could if you waited to buy its stock…
Because of this I recommend not buying Home Depot stock right now.
If you want to buy Home Depot, I recommend you wait until it’s cheaper and its debt levels are lower before doing so… Because in that case it’s a fantastic all-around investment that is less risky and will earn you higher investment returns.
Until then… Hold off on buying it though.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.