Many readers are probably not familiar with Terry Smith. He's a fund manager whose firm is based in England and has a stellar track record. Because of his strategy of trying to buy the best businesses at reasonable valuations, he's known as Britain's Warren Buffett. 

Investors can take a look inside his fund's portfolio to see that Home Depot (HD -0.47%), the leading home improvement chain, is a holding. While it's a relatively small position, I think it's still a smart idea to try and figure out why one of the top fund managers in the world owns this large-cap retail stock. Perhaps then investors could decide for themselves if they should buy shares. 

Here are four valid reasons why I believe Terry Smith likes Home Depot. 

1. Industry-leading position 

With trailing-12-month revenue of $155 billion, Home Depot is the clear leader in its industry. But because the home improvement market is so massive, with an estimated value of $950 billion, the company's market share is still relatively small. The industry is so fragmented that it presents Home Depot with a sizable opportunity to continue growing as we look ahead. 

By dominating the market, Home Depot has become a trusted brand among both DIY and professional customers. This standing is bolstered by having a network of more than 2,300 stores scattered mainly across the U.S., but also in Canada and Mexico. In fact, here in the U.S., 90% of the population lives within 10 miles of a store, which increases accessibility for customers to shop for the right tools and supplies to complete projects. 

Additionally, Home Depot benefits from scale advantages. By generating so much revenue, it has tremendous buying power with its suppliers and vendors, allowing it to obtain cost savings that can be passed on to customers. This also ensures that there is ample inventory availability, something a small independent mom-and-pop shop can't compete with these days.

Some other notable businesses in Terry Smith's portfolio that are clear industry leaders are Apple, Nike, and Visa.  

2. Proven operating leverage 

While Home Depot's revenue has climbed at an annualized pace of 9.3% between fiscal 2017 and 2022, its net income has risen at an even faster clip of 14.1%. This is clear proof that Home Depot exhibits operating leverage, spreading out its fixed costs over an expanding sales base. 

What's really impressive about Home Depot's growth is that it has come with almost no expansion of the store base. Instead, management has focused on figuring out how to boost sales per store. This has come from operational improvements to the supply chain, as well as developing seamless omnichannel capabilities. 

Sales per square foot, perhaps the most important metric for any retail business, totaled $685 in the most recent quarter (Q2 2023 ended July 30), up 36% from five years ago. It also helps that Home Depot gets half of its revenue from professional customers, who tend to spend much more than DIYers 

3. Favorable capital allocation 

Unsurprisingly, the leadership team directs operating cash flow into enhancing the supply chain, improving stores and even opening new locations. But there have been other capital-allocation decisions that have benefited investors greatly. 

Home Depot currently pays a dividend that yields 2.7%. The quarterly payout has consistently increased since it was first introduced in 1987. 

And this is a company that has been a perennial share repurchaser. In the past decade, the outstanding share count has been reduced by 30%. This benefits investors by increasing earnings per share, which can actually support the stock price. 

4. Attractive valuation 

One of Terry Smith's investment principles is to not overpay for businesses he adds to his fund's portfolio. Based on Home Depot's trailing price-to-earnings (P/E) ratio of 18.9, I think investors who buy the stock now will be heeding this advice. That valuation is cheaper than Home Depot's trailing five-year average, and it's also less than a multiple of 20.3 for rival Lowe's. 

Based on the positive attributes I mentioned, investors may have good reason to follow in Terry Smith's path and buy shares of Home Depot.