Now, What’s Next for Stocks?

[CLICK HERE JOIN OUR LIVE TRADING & TRAINING SESSIONS]( Hello investor, Now, What’s Next for Stocks? Inflation data failed to spark a new direction in the stock market. So, Wall Street will turn to earnings reports by big-box retailers to search for any clues on the economy’s health. Home Depot, Target and Walmart are due to report this week, along with retail sales data from July coming out on Tuesday morning. Last Friday, wholesale prices jumped for the first time in a while. Analysts generally consider this index to be a leading indicator of inflation. The reason is simple – it's what companies pay for raw goods. Higher prices for raw goods likely mean finished goods can be more expensive. The question is whether companies can pass along the cost to consumers. If not, profit margins can suffer. And of course, higher raw goods can lead to a higher consumer price index. Meaning? Rates may go higher. - “One open question is if businesses will seek to preserve their profit margins by passing increased wholesale prices onto customers and if they do so, if customers balk at the increases,” said Jose Torres, senior economist at Interactive Brokers. “The potentially higher prices would also influence future CPI readings, which in turn could provide more fodder for hawkish members of the Fed’s Federal Open Market Committee to argue for additional rate hikes. Meanwhile, corporate earnings are showing the strain of a slowing economy and higher financing costs.” Jose Torres, senior economist at Interactive Brokers (Photo: Yahoo Finance) Volatility is back: Despite benchmark indexes finishing one of their smallest weekly changes of 2023, intraday moves were wild. In five sessions through Thursday, the S&P 500 averaged intraday swing of 1.1% -- the widest fluctuation since June, according to Bloomberg. In fact, it was double the average daily move from two weeks ago. Surely, the argument about a soft landing is heating up. - “There’s still the potential for soft landing and there’s still a potential for like a consumer retraction, which leads to a corporate profit contraction,” said Tom Hainlin, national investment strategist at US Bank Wealth Management. “People are trading on the two range of outcomes, so you’ve just got this push and pull.” You can see the spike in daily swings in the graph below: (Source: Bloomberg) We will see whether July’s retail sales data and earnings reports from retailers due this week will spark volatility. Stay tuned.  The No-Brainer Stock To Buy Right Now Today’s Stock Pick: Home Depot ([HD]() The iconic brand of Home Depot began at a coffee shop in Los Angeles in 1978. Two founders, Bernie Marcus and Arthur Blank, were serious DIYers and visualized a superstore that would offer a huge variety of merchandise at great prices and with a highly trained staff. At the core of the store would be people. Namely, people who can walk customers at every skill level through most any home repair or improvement. The first two 60,000-square-foot warehouses were open in Atlanta one year later, and they saw mega success. They dwarfed the competition with more items than any other hardware store. And the rest is history. (Source: Home Depot) King of home improvement. Home Depot operates in a duopoly, along with Lowe’s. This is good. The competitive moat is massive. In the US, 90% of the U.S. population lives within 10 miles of a Home Depot! And there is little competition beyond Lowe’s. Consider this fact. Home Depot has 2,317 warehouse-style stores in the US, Canada and Mexico. The third-largest competitor, Menard’s, has only 335 stores in 15 states. In other words, HD has SEVEN TIMES more stores than the third-largest competitor. Not an eCommerce-friendly industry. That’s the most beautiful thing about Home Depot’s competitive moat. Its products are not e-commerce friendly. You can’t order and have lumbers or granite countertops delivered without exorbitant costs in shipping. Plus, home improvement professionals need nearby stores to pick up any last-minute items. Home Depot’s scale is attractive to the Pros, and they make up 45% of HD’s sales. Lowe’s had two times lower at 25% of its sales. For those products that are possible for online orders, Home Depot still dominates the competition with over 60% market share of online spend. This graph shows from 2020 to 2021, and there’s no latest update for 2022-2023. Regardless, you get an idea of how dominant Home Depot is: (Source: Edison Trends) The advantage of scale: Home Depot holds powerful bargaining power with vendors because of its scale. Result? Higher profitability. To see how ridiculously profitable Home Depot is, you only need to compare it to Lowe’s. Last year, HD’s profit margin was at 10.8% versus Lowe’s 8.6% -- or 25% higher. Naturally, this leads to a phenomenal return on invested capital. Home Depot holds the big lead in ROIC over other competitors with about 43% higher than Lowe’s (the second place): (Source: GuruFocus) Return on invested capital has been the emphasis from the management team. During the investor presentation, it emphasized on two things – (1) consistently grow market share, and (2) deliver exceptional shareholder value. And it sure delivered the goal by quadrupling its ROIC since 2009. (Source: Home Depot) Recession-proof. Home improvement is a cyclical industry, and Home Depot may see a year or two of slowing sales growth in the next decade. It is the nature of this industry. However, the floor is comfortably high. Lowe’s CEO said that two-thirds of his company’s sales fall in the non-discretionary category. Why? When a toilet breaks, the homeowner has no choice but to repair it. While the number was for Lowe’s, you can reasonably estimate the number to be similar to Home Depot’s. This puts the floor on sales despite inflationary and economic pressures. Home Depot will take good care of you. HD is known for its superior customer service. And it doesn’t limit to the customers. As a shareholder, you will be taken care of. HD has a five-year dividend growth rate of over 18%. The share count was cut in half in the last 15 years through share buybacks. And that will continue. Shareholder returns were the focus in the recent earnings call: - “And during the quarter, we paid approximately $2.1 billion dollars in dividends to our shareholders, and we returned approximately $3.0 billion dollars to shareholders in the form of share repurchases.,” said CFO Richard McPhail. Plenty of growth ahead: Believe it or not, Home Depot only holds 17% of the US home improvement market share. The company’s addressable market is COLOSSAL at $900 billion in size. (Source: Home Depot) Keep in mind, Home Depot hasn’t expanded much into Canadian and Mexican markets, which would represent a huge growth opportunity. (Source: Home Depot) Bottom line: You can’t ever go wrong with Home Depot. Its competitive moat is deep and wide. Competitors (even Amazon) can’t penetrate because of its scale advantage. This leads to a massive return to shareholders through share buybacks and dividends (currently at 2.52%). With its P/E at 20, the stock is trading at a perfect valuation. You’ve got a high-return business with a big growth opportunity in the Canadian and Mexican markets. Buy and hold this stock forever. [CLICK HERE JOIN OUR LIVE TRADING & TRAINING SESSIONS](       © All Rights Reserved, Trade Alliance If you no longer want to receive these messages, you may [click here]( to unsubscribe.