Is the rally back on?

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Wall Street cheered strong earnings reports from Meta and Amazon, and a positive outlook could kick off a new rally in stocks. Meta’s revenue guidance beat estimates, announced its first-ever quarterly dividend, and authorized an additional $50 billion in buybacks. In other words, Meta is turning into a classic shareholder-friendly company. Amazon also reported strong profit and its operating income outlook was better than estimates. Apple’s sales finally halted its one-year streak of declining sales. The fiscal first quarter’s revenue was up by 2.1% -- nearly two times higher than the estimate of 1%. The sales from iPhone was strong and exceeded expectations. (Source: Bloomberg) All in all, these three Big Tech companies reported strong results that relieved some of Wall Street’s anxiety about whether tech companies can post attractive growth rates to justify their lofty valuations. We will get the latest jobs report today. Yesterday, a report of unemployment claims showed that they unexpectedly jumped to a two-month high, hinting at a cooling labor market. Economists expect payrolls to increase by about 185,000 in January versus a gain of 216,000 in December. Bad economic data doesn’t mean bad news for stocks. Wall Street is hoping for more rate cuts this year, so any data that shows a slowing economy could push the central bank into cutting rates sooner. Fed officials are likely to be hesitant about cutting rates if the economy is doing so well. In fact, the Atlanta Fed’s GDP estimate jumped to 4.2% for the first quarter in its weekly update. It projected just 3.0% growth last week. If it remains true, it would be a major acceleration from the 3.3% annualized growth rate in the fourth quarter of 2023. So, the jobs report could give a glimpse at what the Fed could do from now on. - “I think the market has been getting ahead of itself, with pricing in many more rate cuts, because it will be associated with a much weaker economy if they were to cut as many times as the market is currently pricing,” Apollo Global Management chief economist Torsten Slok said. The High ROIC Stock to Own 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 2022-2024. 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 10.22% versus Lowe’s 8.5% -- or 20% higher. Naturally, this leads to a phenomenal return on invested capital. Home Depot holds the big lead in ROIC over other competitors: (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. 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 2.32%). With its P/E at 23, 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.   [EARN WHILE YOU LEARN! 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