Here's what some might consider a contrarian play for me, considering that I haven't exactly been in a love affair with Bob Nardelli. Despite the woes of its ousted CEO, I'm choosing Home Depot (NYSE:HD) as my top retail stock for 2007.

Let's see why Home Depot -- and not longtime nemesis Lowe's (NYSE:LOW) -- will reign supreme this year:

  • It's focused. The top story of 2006 is now a footnote: Nardelli and his boorish behavior are just cocktail talk now.
  • It's big. It has more than 2,100 stores in the U.S., Puerto Rico, Canada, Mexico, and elsewhere. In 2005, it had $81.5 billion in revenues and profits of $5.8 billion. On a trailing-12-month basis, revenues were in excess of $90 billion, with earnings surpassing $6.1 billion. Lowe's, on the other hand, is about half the size and earns only half the profits.
  • It's nimble. For all its size, and for whatever metric you choose to compare, Home Depot is able to match Lowe's or beat it every step of the way. Price-to-sales? Home Depot rings in at 0.99, Lowe's at 1.13. Net profit margins? Home Depot, 6.8%; Lowe's, 6.7%. Where Home Depot's total debt stands in excess of $8.2 billion to Lowe's $4.1 billion, the Depot's debt-to-equity ratio matches Lowe's at 0.29. And it trades at a lower multiple than its competitor does.

OK, so perhaps I've laid out the case for Home Depot beating Lowe's in the race this year, but what about the market? There are a lot of retailers vying for the top spot -- even Sears Holding (NASDAQ:SHLD) seems to exude Eddie Lampert magic. So why should Home Depot emerge victorious?

When you've been beaten down, you have the chance for a bigger surprise.

Betting on the underdog
Despite its CEO getting the boot and a new face taking command, markets tend to be ambivalent about a company's ability to perform in such situations.

Francis Blake, while a newcomer to the CEO position (he's never run a company before), is seen as a Nardelli protege who will try not to rock the boat while steering the company through the waters already charted by his predecessor. I think they read the man wrong. He may be a newcomer, but he's been around the block, and I don't think he'll hesitate to put his own stamp on Home Depot's course. The retailer wasn't so much floundering on the shore as distracted by the man steering the boat.

That's not to say Blake doesn't have his work cut out for him. Employee morale is low and customer dissatisfaction with service is high. Contractors are said to be distrustful of using HD Supply, the company's contractor-only warehouse-store concept, but I think that's more anecdotal than real. HD Supply was able to organically grow revenues by 7% over last year, though that also caused a decline in gross margins year over year because it is a lower-margin business than the retail outlets.

Sure, the weakening housing market will play havoc with results, but acquisitions in the supply business will help reduce its cyclicality. The overall economy remains strong with low inflation, fuel prices are easing, and international growth possibilities abound in Canada, Mexico, and now China.

What do you think, Fool?
How about you? Do you think Home Depot is set to rebuild its image as the top retailer in 2007? You can rate Home Depot's performance relative to the market in the Motley Fool CAPS community-intelligence database. Just click here to say your piece. Based on the responses of our readers and participants, we'll declare the best retail stock of 2007 early next week.

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Home Depot is a recommendation of Motley Fool Inside Value. A 30-day guest pass gives you full access to all the reasons why Big Orange should continue to be a winner with or without the distractions at the top.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.