With $500 million in annual sales, American Woodmark
Home Depot is the nation's largest home-improvement chain, so when it recently saw a drop in same-store sales and slowed its sales promotions, its suppliers could soon expect lower orders. The Fool is currently dueling about the company's prospects. As today's news demonstrates, a lot more than just Home Depot depends on Home Depot.
This news also reiterates an important investing lesson: When a large company at the top of a chain of business starts to waver, the companies beneath it -- suppliers, mainly -- will likely see the effects soon. As an investor, you need to know your companies' largest customers.
On page one of American Woodmark's annual SEC statement is this: "During the last fiscal year, American Woodmark had two customers, The Home Depot and Lowe's Companies, Inc.
So, investors in American Woodmark had at least one month's warning that sales would likely decline, given that Home Depot was having trouble. Such business relationships can also make for good shorting opportunities. Savvy investors (and I wasn't one of them) who saw Home Depot falling could have sought out its public suppliers and bet against those stocks. Today, they'd be making good money being short American Woodmark.