Home Depot: More Savings, Less Doing

NEW YORK ( TheStreet) -- I was chided two months ago when I told investors that shares of Home Depot ( HD), which were then coming off a strong May quarter report, were not as attractively priced as rival Lowe's ( LOW), which, by contrast, had posted a disappointing first quarter.

Two months later, it seems the Street agrees. Home Depot has traded flat to slightly down while Lowe's has been up by more than 12%.

I'm not going to overstate what this means. A two-month performance does little to erase the fact that shares of Home Depot, which have soared more than 190% over the past five years, more than doubled Lowe's performance during that same span. But that's exactly the point. The Street has always loved this stock. What are the odds this love affair will last for the next five years? If this recent quarter was any indication, Home Depot is determined to make it a hard breakup.

It's not often that I get excited about an earnings performance. But what Home Depot managed to do was pretty remarkable. Not only did the company post revenue growth of more than 9%, but same-store sales (comps), which track the performances of stores that have been opened for at least one year, surged closed to 11%. This is an astounding number, especially since the Street was looking for same-store sales growth of just 7%.

Here again, I want to be careful to not exaggerate the meaning of this number. But just to put it in proper perspective: Wal-Mart ( WMT) just posted flat comps, while the Street would have been happy if Wal-Mart had only delivered 1% growth. Likewise, McDonald's ( MCD) just recently posted 1% growth in comps. Obviously, McDonald's and Home Depot are in completely separate businesses. But it's still consumer spending.

What's more, you would have to go back to 1999 to find when Home Depot performed so well in terms of U.S. comps. Clearly, the company knows what it's doing. The Street is more than justified for wanting to "build a position" in Home Depot.

My issue, though, is given the stock's strong uptrend over the past five years, which was spurred by the housing recovery, I just don't believe there's much outperformance left.

Along similar lines, I believe Wal-Mart and even Target ( TGT), though they have not operated as well as Home Depot, might present stronger stock gains. Not to mention they are both trading at much cheaper valuations -- eight and seven points lower, respectively, on their price-to-earnings ratios, when compared to Home Depot's P/E of 22. So, in the case of Home Depot, this is clearly a value judgment on the stock and less of an indictment on the company's performance.

The Street has never flinched from paying a higher multiple for Home Depot. With 11% comp growth, this is hard to argue with. But by every measurable standard, including discounted cash flow, the stock is expensive.

I'm not saying the stock won't go up at all. Nor am I foolish enough to suggest that these shares lack value. But I do believe that for the foreseeable future the trend we've seen over the past couple of months will continue -- shares of Lowe's will meaningfully outperform Home Depot.

In the meantime, as these two bitter rivals continue to battle it out, investors will get the benefit of owning two of the best yields on the market. When it's all said and done, I do expect Lowe's, which has lagged Home Depot in store-level and supply chain productivity efficiency, would have narrowed the gap. Essentially, while Home Depot becomes a safe stock to own, there will be "less doing," which is to say, the stock may not be going anywhere for a while.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.