Trader ideas for a bear market: honor your stops on existing longs, be selective on any long side po...
No Place Like Home
08/25/2008 12:00 am EST
Mark Skousen, editor of Hedge Fund Trader, says importer Home Depot is a good way to play a strengthening US dollar.
You may have noticed that the greenback is finally marching higher.
[A couple of weeks ago], the euro fell to 1.47 against the dollar, and the dollar also fetched 110.5 yen. The British pound fell against the dollar for 11 straight days, the longest streak since 1982.
During the past month, the US currency has gained 8% against the euro and pound, and nearly 6% against the yen.
This trend is overdue and likely to last a while. And that makes this a good time to buy major US importers. Why? They will reap a windfall from increased purchasing power in overseas markets.
Perhaps the single most attractive investment now is the nation’s third-largest importer, Home Depot (NYSE: HD).
Home Depot has nearly 2,000 locations throughout the United States, Canada, Mexico, and China, selling more than 40,000 products in stores that average more than 100,000 square feet. The company also offers national installation services through certified independent contractors.
First-quarter earnings were not great. And [second-quarter earnings continued] to show the effects of the slowdown in home building and renovation. (Last Tuesday HD reported that earnings fell to 71 cents a share, from 81 cents in the second quarter of 2007. Earnings topped analysts’ estimates of 61 cents a share, however—Editor.)
But notice that the stock has been trending higher during the last month. That’s because some analysts, including me, expect the company to announce a more favorable outlook for the months ahead. Here’s why:
Home Depot has invested $180 million to add more associates to the store floors during peak hours. It has hired more than 3,000 master plumbers and electricians. And it began giving cash rewards to associates who get top scores in product-knowledge tests. Plus, Home Depot will open at least 55 new stores this year.
No wonder director David Batchelder has been piling into the stock during the past few months, buying more than 3.1 million shares. That’s an investment of more than $53.5 million, indicating a high level of conviction that shares are undervalued.
Clearly, Batchelder—who has access to plenty of material, non-public information as a board member—feels that that a rebound is coming sooner rather than later. (He runs an investment advisory boutique and worked with T. Boone Pickens for years—Editor.)
And we’ll collect a 3.3% dividend yield while we wait.
So, buy Home Depot at market today. (It closed above $27 Friday—Editor.) And place a protective stop at $22. If you prefer to play this one more aggressively, try the January 2009 $30 calls (HDA-F). (They were trading at around $1.30 Friday—Editor.)Subscribe to Hedge Fund Trader here…
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