Home Depot Could Sell Off to 300

Dow component Home Depot Inc. (HD) is trading lower by more than 3% in Tuesday’s pre-market after beating Q2 2021 top and bottom line estimates by slim margins. The home improvement giant posted a profit of $4.53 per-share during the quarter, $0.10 better than expectations, while revenue rose a modest 8.1% year-over-year to $41.12 billion, less than $400 million above consensus. US sales rose just 3.4%, highlighting tough ‘comps’ after last year’s COVID-driven windfall.

Post-Pandemic Hangover

The company generated historic revenue in 2020, underpinned in the first half by pandemic lockdowns that freed up time for at-home activities, and in the second half by the migration of the Zoom crowd to new parts of the country.  Mean reversion has now resumed control of quarterly performance, easing toward historic norms that underpinned years of higher prices. However, the stock has already gained 22% so far in 2021, raising doubts about second half performance.

Other big players in the retail space are dealing with similar headwinds, as evidenced by an identical sell-the-news reaction after Walmart Inc. (WMT) also beats estimates on Tuesday.  Amazon.com Inc. (AMZN) remains the poster child for this 2021 performance hangover, posting a 0% return since July 2020 after soaring 81% earlier that year. All in all, this malaise perfectly illustrates the old market adage that “the bigger the move, the broader the base”.

Wall Street and Technical Outlook

Wall Street consensus is locked into an ‘Overweight’ rating based upon 19 ‘Buy’, 4 ‘Overweight’, 20 ‘Hold’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $300 to a Street-high $391 while the stock is set to open Tuesday’s session about $27 below the median $350 target. A descent to the low target is possible with this configuration, which makes sense because support at June’s rangebound low is situated just below that level.

Home Depot broke out above 2018 resistance just above 200 in September 2019 and topped out at 247.36 in February 2020, ahead of a pandemic decline that dropped the stock to a three-year low. The subsequent uptick mounted first quarter resistance in June, yielding a two-legged advance that posted an all-time high at 345.69 in May 2021. A persistent pullback found support at 303.83 in June while the bounce into August has reversed at the .786 Fibonacci selloff retracement level. In turn, this also raises odds for a quick trip to 300.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.