By Michael Brush
The insider buying : A director recently purchased $431,000 worth of stock at $288 per share.
Shares of Home Depot /zigman2/quotes/208081807/composite HD -0.49% , the world’s largest home improvement retailer, are down over 31% this year. This doesn’t really make sense because performance is great, especially for a retailer. First-quarter results confirmed this.
“The company beat on revenue. It beat on earnings and it raised guidance. But they still got punished by the market,” says Tengler, which owns the retailer on behalf of her clients at Laffer Tengler Investment. “The first quarter is usually slow, and this was their highest quarterly sales ever.”
Morgan Stanley analyst Simeon Gutman thinks the guidance raise was conservative.
One fear is the housing market slows down as home mortgages rise. But Tengler contends this isn’t really a negative, since people are more apt to do home improvements when they stay put.
“Given pent-up demand for home-improvement jobs and labor scarcity, the backlog of projects should persist throughout 2022,” says Gutman.
Home Depot also has pricing power, a plus in the inflation era. We know this because while the number of customer transactions slipped by 8% in the first quarter, the average ticket rose by 11.4% to $91.72. This helps support the company’s 15.5% operating margins which is high for the sector, says Lowenstein. He also likes the 2.7% dividend yield, and the fact that Home Depot can continue to boost the dividend since it produces so much free cash flow – an expected $15 billion this year.
J.P. Morgan analyst Christopher Horvers has an overweight rating on the company in part because he thinks it is resistant to Amazon.com /zigman2/quotes/210331248/composite AMZN -1.85% . With home improvement projects, people prefer to touch and see products before they buy, and ask for advice. Morningstar Direct analyst Jaime Katz cites Home Depot’s size and brand strength to support a coveted wide moat rating on the name.
The insider buying : A director just bought $2 million worth of stock at $ 79.30.
As an investment bank, Morgan Stanley’s /zigman2/quotes/209104354/composite MS -0.51% performance is directly linked to the stock market and the economy. This makes it a cyclical name with volatile results. Revenue slipped 5.7% in the first quarter to $14.8 billion. The stock is down 25% from highs earlier this year.
Look under the hood, and you’ll find some business diversification which offsets the cyclicality and volatility, contends Sonny Lin, a senior portfolio manager at Wealth Enhancement Group which has a position in this name. Last quarter, for example, market volatility helped create strong revenue gains in its trading arm, which offset weakness in investment banking and wealth management.
Tengler, whose Laffer Tengler Investments also owns the name, says the wealth management business is attractive because of the relatively predictability of fee income. “It looks like an annuity,” she says.
This business also has high profit margins, supporting an overall 20% return on tangible equity. Tengler also likes the strong free cash flow, backing the 3.4% dividend yield.
The insider buying : A director recently bought $75 million worth at $63.92 to $72.85.
As goes crypto, so goes Coinbase /zigman2/quotes/225893452/composite COIN -5.48% . That’s because this company is the leading U.S.-based cryptocurrency exchange. As bitcoin, Ethereum, and other cryptocurrencies tanked 50% or more since November, transaction fees plummeted. First-quarter revenue fell 53.2% from the prior quarter to $1.16 billion.
On top of that operating costs rose sharply, by 111%. This pushed net income deep into the red. The upshot: Coinbase stock has fallen 83% since November to trade recently under $62. Down here, a director has said enough is enough, purchasing a sizable $75 million worth of stock.
What’s there to be bullish about? Bitcoin and other cryptocurrencies are here to stay despite regulatory challenges. Coinbase has built a reputation and track record that support its staying power and higher transaction fees, says Morningstar Direct analyst Michael Miller. He has a $131 fair value estimate on the stock, and a four-star rating out of a possible five.
Unlike other platforms, Coinbase has multiple revenue streams. It acts as an asset custodian and broker, and it offers collateralized loans, a crypto debit card, blockchain infrastructure support, and data analytics. Expansion into new product lines will now be easier because of the crypto downturn, says CEO Brian Armstrong. “We see the down period as a big opportunity because we’re able to acquire great talent as others pivot, get distracted, and get discouraged. We tend to do our best work in a down period.”
J.P. Morgan analyst Kenneth Worthington maintains his “overweight” rating, despite cutting his price target to $171 from $258, citing Armstrong’s strategy of continuing to invest in the business even though the tide has turned. Worthington also likes the company’s strong balance sheet.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned AMZN. Brush has suggested HD, MS and AMZN in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.