The market's recent rally has made it much harder to find attractive stock deals if you're a growth-focused investor. The Nasdaq Composite index, home to many growth stocks, has surged by 15% since late October. Percentage gains have been much higher for some individual stocks such as Nvidia.
So if you're seeking undervalued options, broadening your investment search beyond the most popular tech stocks can help. Consider the case of Home Depot (HD 0.94%), for example, whose shares are down by more than 10% from the peak that they touched in late 2022. That slump has been driven by weakening earnings trends, of course. But the home improvement retailer's long-term outlook is bright.
Soft landing
It's true that Home Depot's business is taking a step backward right now. Comparable-store sales are on track to post a rare decline for 2023, dropping roughly 3%. Sales have fallen by that same rate over the last nine months.
A little context shows how bright the wider growth picture is. Home Depot added $50 billion to its annual sales base in the prior three years, and is only likely to give up about $5 billion of those gains for its fiscal 2023.
The industry leader is also outperforming its rivals in the home improvement industry, where sales have slipped broadly. Lowe's (LOW -0.04%) sales were down 9% through the first three quarters of the year, and its comparable-store sales are expected to be down by 5% for the full year. That performance gap is mainly thanks to Home Depot's market share leadership, particularly in the professional contractor niche.
Strong foundations
Both Home Depot and Lowe's are highly bullish about the outlook for their industry once it gets past the current slump that's been driven by rising interest rates. Those rates won't stay at quite this elevated level forever, after all, and the Fed expects to start cutting its benchmark federal funds rate in 2024. Meanwhile, there are favorable industry factors like demographics and the average age of housing stock to support an eventual rebound. "We remain very positive on the medium-to-long term outlook...and our ability to grow share in a large and fragmented market," Home Depot executives told investors in mid-August.
Investors buying this stock today won't have to wait until the recovery to start benefiting from Home Depot's stellar finances. Its profit margin is staying above 14%, just a modest dip from the 15% rate that investors saw last year. Operating cash flow is surging in the meantime, helping to fund ample cash returns from stock buybacks and Home Depot's growing dividend.
Risks and what to watch
Home Depot won't be much of a growth stock if sales trends don't eventually rebound. For signs of that success, investors should keep a close eye on customer traffic trends. Traffic is down 3% in 2023 to date and fell 5% in 2022. The difference this year has been that higher average spending per visit isn't offsetting those traffic drops.
Assuming Home Depot can return to balanced growth on traffic and average spending once the industry starts expanding again, you should consider buying this stock at today's discount. Shares are priced at 2.3 times annual sales, down from a peak valuation of nearly 3 times sales back in early 2022. There might be more short-term volatility ahead for this business as economic growth rates stabilize. But Home Depot is highly likely to be setting sales and earnings records in a few years.
