Home Depot hot spot (and, yes, you may have seen some of this earlier on the RealMoney.com Columnist Conversation, but I just couldn't resist passing it along to a broader audience): Don't overlook the importance of Home Depot's (HD:NYSE - news - boards) warning today of disappointing fourth-quarter earnings. Here's a stock that very recently was trading at 50% above its very recent lows, as investors thought, "Ah, this is Home Depot, it's a sure bet as the Fed loosens. It has a new CEO from GE (GE:NYSE - news - boards) who knows how to cut costs."

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Don't bet on it. This is its second disappointment in less than three months: Could this be a trend? And most important: Sales at stores open more than a year (comp store sales) are flat. Flat! Is this Home Depot or Kmart (KM:NYSE - news - boards)? Flat comps and they're still opening stores. You open stores, say the retail pros, when sales are rising and you're looking to fill opportunities, not when sales are flat. (Remember my column's concerns, last year, that Home Depot was opening so many stores that it appeared the company could start cannibalizing itself ? Looks like that's now happening! And don't think Home Depot doesn't know that. According to one of my exceptional spies -- one who is known for taking copious notes -- at a Sept. 19 breakout session at the Banc of America growth-stock conference, Home Depot co-Chairman Bernie Marcus was asked about plans for Village Hardware, the company's small-store concept. He replied, "We're beginning to satur ...," then he stopped that and said: "We may have to go with smaller stores.")

Another way of looking at it: Home Depot trades at around 38 times earnings. Lowe's (LOW:NYSE - news - boards), which itself is suffering, is at around 21 times. The 38 times suggests HD's earnings are growing at 38%, which is fine, except quarter over quarter they're falling! What happens to its stock if it gets a Lowe's multiple? That would put it in the low 20s. But, of course, Home Depot is Home Depot. (I like to call it the Sara Lee (SLE:NYSE - news - boards) of stocks; nobody doesn't like it!) So, it's hanging tough this morning, trading at 38 times earnings for 10% annual growth.

But, argues one reader, wouldn't it be right to assume the new CEO is doing everything to wipe the slate clean "by taking every kind of bath you could as soon as you could?" Sure, but this isn't something that happened overnight in a market that I believe is well overstored -- not just by Home Depot, but by loads of retailers that overexpanded in the boom times . "It's like changing from a race car to a minivan," says the copious note-taking source. "You have to downshift the entire organization, cut costs, focus on return on capital. You don't have new openings to provide automatic growth. It will take a year or two."

And this note: Looks like anybody who was concerned about Home Depot's 10% off pre-Christmas sale had good reason. Also heard from a CPA who represents in the wood products, pine seedlings, lumber treating and sawmill businesses -- companies that supply both Home Depot and Lowe's. He says they're all suffering. "Due to this oversupply, the wholesale market for lumber has been in a two-year spiral of death. Lumber prices have declined 50%-60% in the past two years (25% from 12/99 to 12/00). There is no way HD and others can have good same-store sales numbers with those type of declines in lumber prices.

"I should also mention that any company with sawmill assets is getting clobbered. Most mills in the South are shut down until the market recovers. In some cases the logs cost more than the lumber is worth after it is manufactured. There are going to be a lot of bankruptcies. ... There appears to be little relief in sight." Yikes, not good news for the likes of Georgia-Pacific (GP:NYSE - news - boards).