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Home Depot: Could the Housing Recovery Be Cooling Down?

By Alison Southwick and Michael Finarelli – Feb 25, 2014 at 2:30PM

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A recovery in the housing market has been fantastic for Home Depot, but is this ride losing steam?

Home Depot (HD -0.27%) reported earnings this morning before the market opened, with investors reacting positively to the news and bidding the stock up more than 2%. Earnings per share were up 6% over the same period last year to beat analysts' estimates by two pennies, and same-store sales grew by more than 4%. The company is projecting 4.6% same-store sales growth for 2014 as a whole, which, while it doesn't match up to 2013's incredible 7% pace, does show that management is still confident that the housing recovery trend is still going strong.

Others, however, are not so sure. On today's Stock of the Day, Motley Fool analyst Mike Finarelli points to the housing market index data recently released by the National Association of Home Builders suggesting that the housing market may be showing signs of contraction. Mike also notes that with thoughts of rising interest rates looming, there is fear that higher rates would stifle any further recovery.

That said, is Home Depot a buy today or do the macroeconomic risks spoil the fun here? Mike says he's still a buyer. The company's large advantage of scale and its management focused on smart capital allocation make it a great business, and though it may be a little bit expensive today at around 21 times earnings compared with the S&P 500 at around 18 times earnings, he believes the strength of the business and the continued housing tailwinds make it worth the price in the long run.

Alison Southwick and Michael Finarelli have no position in any stocks mentioned. The Motley Fool recommends Home Depot. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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