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Home Depot stock is still a good investment despite rare misstep: analysts

Brian Sozzi
Editor-at-Large

Wall Street is still in love with Home Depot (HD) as an investment.

But suffice it to say, Tuesday’s trading session for the king of home improvement could be filed under the abnormal column.

Home Depot shares fell about 5% in afternoon trading as third quarter same-store sales rose 3.6%, below analyst forecasts for 4.6% growth. U.S. same-store sales increased 3.8% versus projections for 5.4% improvement. It’s a rare quarterly sales shortfall for Home Depot — and so is the market’s reaction on earnings day.

Earnings came in a penny ahead of estimates at $2.53 a share.

Executives blamed the delayed impact of investments in business — focused on faster delivery of online orders, store remodels and offering new services to contractors — for the sales shortfall.

The company cut its full-year same-store sales outlook to 3.5% growth from 4% previously. It reiterated its full year earnings guidance of about $10.03 a share.

Wall Street by and large came out quickly to defend Home Depot’s stock, long a top play for many strategists. Some have reasoned Home Depot will continue to benefit from favorable dynamics in the housing market, ranging from low interest rates spurring remodeling activity to a pick up in building activity in 2020.

“The macro nature of their business is in better shape,” Gradient Investments portfolio manager Jeremy Bryan said on Yahoo Finance’s The First Trade. Gradient owns Home Depot shares.

To Bryan’s point, U.S. housing starts rebounded in October and housing permits rose to a more than 12-year high, the U.S. Commerce Department said Tuesday.

In this Monday, Sept. 23, 2019 photo a worker pushes carts in front of a Home Depot store location, in Boston. (AP Photo/Steven Senne)

Others remain bullish on Home Depot’s longer term execution and how it’s doing well in the age of digital shopping.

“We expect some weakness in HD today, given the underwhelming results and likely downward estimate revisions. That said, with HD viewed as among the highest-quality names and with some macro tailwinds, we think the downside damage to the stock could be mitigated,” Nomura Instinet analyst Michael Baker wrote in a note to clients.

Baker’s bullishness was echoed by Jefferies analyst Jonathan Matuszewski.

“3Q comp sales were light, though operating margins in-line with expectations. We believe shares down in the pre-market create a buying opportunity, as we interpret lighter 2H results to be more tied to timing of returns on strategic investments vs. a softer macro picture. These results don't change our view of a favorable industry backdrop with ongoing home improvement center share gains across most categories,” Matuszewski said.

But make no mistake: if Home Depot doesn’t deliver in the fourth quarter, those defending its stock may not be so inclined to do so again.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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