Home Depot Inc. (HD): Are Hedge Funds Right About This Stock?

Macroeconomic fundamentals in the U.S. economy and housing market are the primary drivers of Home Depot Inc. (NYSE:HD)’s financial performance. Interestingly enough, some analysts and investors consider the home improvement retailer as an appropriate barometer for the U.S. housing market and the world’s largest economy in general. U.S. companies added 242,000 jobs in February, more than the gains of 172,000 jobs registered in January. The jobs market has been constantly tightening and the U.S. housing market continues its recovery from the aftermath of the financial crisis, so Home Depot appears to be well-positioned to keep growing in the quarters ahead. The 700+ hedge funds and money managers tracked by Insider Monkey have already compiled and submitted their 13F filings for the final quarter of 2015, which unveil their equity positions as of December 31. Our extensive review of these public filings is finally over, so this article is set to reveal the smart money sentiment towards Home Depot Inc. (NYSE:HD).

Home Depot Inc. (NYSE:HD) has experienced a decrease in enthusiasm from smart money in recent months. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Intel Corporation (NASDAQ:INTC), Citigroup Inc. (NYSE:C), and HSBC Holdings plc (ADR) (NYSE:HSBC) to gather more data points.

Today there are several metrics that market participants employ to grade stocks. A duo of the less utilized metrics are hedge fund and insider trading indicators. Our researchers have shown that, historically, those who follow the top picks of the best hedge fund managers can outclass their index-focused peers by a significant margin (see the details here).

The shares of Home Depot are up by 9% over the past 12 months, despite plunging on fears that the U.S. economy would enter a “recession” mode in 2016. However, those worries and concerns have alleviated in the past several weeks, mainly owing to strong fresh economic data. Home Depot Inc. (NYSE:HD) generated net sales of $88.52 billion during fiscal 2015 that ended January 31, up from the $83.18 billion reported for fiscal 2014. This top-line growth reflects the “continued recovery in the U.S. housing market”. Similarly, the company’s comparable store sales increased 5.6% year-on-year, while comparable sales for U.S. stores grew at a more attractive rate of 7.1% year-on-year. In the meantime, Home Depot’s earnings per diluted share for fiscal 2015 totaled $5.46, which marked an increase of 15.9% year-over-year.

Keeping this in mind, let’s review the key action surrounding Home Depot Inc. (NYSE:HD), as well as discuss whether the stock represents an attractive buying opportunity.

The primary question investors might ask at the moment is whether or not Home Depot Inc. (NYSE:HD) represents an attractive opportunity? Long story short, the future performance of the leading home improvement retailer is fully dependent upon the underlying strength of the U.S. economy, which will most likely continue to grow in the upcoming quarters or even years. Nonetheless, let’s take a quick glance at some indicators and recent developments to see whether Home Depot represents an attractive investment relative to other companies in the market. Just recently, Home Depot’s Board of Directors declared an increase of 17% in the company’s quarterly dividend to $0.69 per share, which denotes a current dividend yield of 1.88%. The stock is priced at 18.07-times expected earnings, below the forward P/E multiple of 19.2 for the Home Improvement industry. Therefore, one could say that Home Depot is fairly valued at this point in time. It should be noted that the company’s management anticipates sales growth in the range of 5.1%-to-6.0% for fiscal 2016 and diluted earnings-per-share growth (after anticipated share repurchases) in the range of 12%-to-13%. So Home Depot Inc. (NYSE:HD) probably deserves a higher valuation given the current state of the U.S. economy. At the end of February 2016, analysts at BMO Capital Markets reiterated the ‘Outperform’ rating on the stock and raise the price target to $144 from $137.

What have hedge funds been doing with Home Depot Inc. (NYSE:HD)?

Heading into 2016, a total of 62 of the hedge funds tracked by Insider Monkey were long this stock, a decline of 10% from the third quarter. With hedgies’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Fisher Asset Management, managed by Ken Fisher, holds the most valuable position in Home Depot Inc. (NYSE:HD). Fisher Asset Management has a $1.12 billion position in the stock, comprising 2.2% of its 13F portfolio. The second most bullish fund manager is AQR Capital Management, managed by Cliff Asness, which holds a $321.9 million position; the fund has 0.6% of its 13F portfolio invested in the stock. Other members of the smart money that are bullish comprise Phill Gross and Robert Atchinson’s Adage Capital Management, John Armitage’s Egerton Capital Limited and Ken Griffin’s Citadel Investment Group.

Judging by the fact that Home Depot Inc. (NYSE:HD) has witnessed bearish sentiment from the aggregate hedge fund industry, we can see that there was a specific group of fund managers that slashed their entire stakes by the end of the third quarter. It’s worth mentioning that Matthew Hulsizer’s PEAK6 Capital Management dumped the biggest position of the “upper crust” of funds followed by Insider Monkey, comprising an estimated $45.2 million in stock. Rob Citrone’s fund, Discovery Capital Management, also dumped its stock, about $39.6 million worth. These transactions are interesting, as total hedge fund interest was cut by 7 funds by the end of the third quarter.

The final page of this article examines the hedge fund activity in several companies that have market capitalizations similar to the one of Home Depot.

Let’s also examine hedge fund activity in other stocks similar to Home Depot Inc. (NYSE:HD). We will take a look at Intel Corporation (NASDAQ:INTC), Citigroup Inc. (NYSE:C), HSBC Holdings plc (ADR) (NYSE:HSBC), and Novo Nordisk A/S (ADR) (NYSE:NVO). This group of stocks’ market valuations are closest to HD’s market valuation.

As you can see these stocks had an average of 46 hedge funds with bullish positions and the average amount invested in these stocks was $4.21 billion. That figure was $3.72 billion in HD’s case. Citigroup Inc. (NYSE:C) is the most popular stock in this table. On the other hand HSBC Holdings plc (ADR) (NYSE:HSBC) is the least popular one with only 8 bullish hedge fund positions. Home Depot Inc. (NYSE:HD) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal, but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard C might be a better candidate to consider a long position.

Disclosure: None