Home Depot Earnings Report Illustrates Larger American Trends

  • Home Depot had another great quarter, and the stock is rising in early Tuesday trade.
  • By contrast stores that focus on clothes, like Macy's, are doing poorly.
  • The "cocooning" trend of people staying at home is what is on fire.

Home Depot (NYSE:HD) shares were on fire Tuesday after the company issued another great quarterly report that illustrates what is happening in the U.S. market.

Some attributed the strong Home Depot earnings report to rising home values but there is more than that going on. Regardless of what is going on with our home prices Americans are pouring money into their castles and we’re staying there, often in front of a big-screen TV, munching on take-out from companies like Chipotle Mexican Grill (NYSE:CMG), with one eye on our Apple (NASDAQ:AAPL) iPhones.

Welcome to America in 2015.

Home Depot sales were up 5.5% year-over-year, to $21.82 billion, with net income up 12.2% to $1.73 billion, from $1.54 billion. We’re not going to Home Depot because the stuff is cheap, in other words. We’re going there because it’s there. And we’re buying it with both hands.

Thus Home Depot bounced much higher in early morning trade, to over $125/share. But even at that price you’re looking at a trailing-year Price/Earnings multiple of about 23, perfectly reasonable with a stock that’s yielding nearly 2% in dividends.

This trend toward “cocooning” was first seen during the Great Recession, at the start of the decade. And there was an assumption then that, as the economy improved, people would start going out more. But that hasn’t happened. The middle class economy hasn’t really improved, for one thing. Security fears have added to it. We would rather stay at home.

Contrast the success of Home Depot with the failures of companies that are selling things like clothes and perfume. Contrast it with Macy's (NYSE:M). Macy’s is not a bad store manager. It’s a good one. The problem is that Americans are just not buying clothes and perfume as they once did.

Macy’s shares are down by 38% this year as the numbers continue to disappoint. Revenues for the quarter ending in October were off about 5%, year over year, to $5.87 billion, and net income was cut nearly in half, from $217 million to $118 million, 36 cents per share.

There is a popular series of ads running now for E*TRADE (NASDAQ:ETFC), the discount broker. They star actor-director Kevin Spacey, who walks around in an almost spectral way alongside well-dressed people playing the site’s customers. In one ad a woman sees men with beards, then one come out of a barber shop, indicating shaving stocks might be good. The idea is that ordinary investors can spot trends and profit from them. It’s “eye test” investing.

I’m not usually one for the eye test, but sometimes, near the peak of an economic cycle, it really works. And it works now. Although, looking around at my fellow Americans, I sort of wish it didn’t.

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