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Tuesday, August 22, 2006

Home Depot: Maybe Things Are Not So Bad After All

Stocks: (HD)(LOW)

The short interest in Home Depot dropped a lot this month by about 34 million shares to a total of 43 million. That's a big drop, particluarly for a company that has gotten its share of bad press.
Based on recent news out of the company, investors hate the CEO and board for overpaying management. The company has been criticized for no longer disclosing monthly same store sales, a key metric of retail performance.

Home Depot's growth has also slowed. Part of the reason is the decline in home sales and new construction. The company guided for the second half of 2006 to be at the low end of previous forecasts for revenue and earnings. And, the company has gotten so large that growth is more difficult. Based on the last quarter, the company has an annual revenue run rate of over $100 billion.

Another concern is that Lowe's, Home Depot's main competitor, is taking share from HD. Lowe's total sales for the last quarter were up12% to $13.4 billion. But, Lowe's also gave luckwarm guidance.

Perhaps the best argument explaining why shorts are moving out of the stock is that most of the really bad news is behind Home Depot. Investors hate the CEO, but that will pass. At $34.36, the stock trades at the low end of its 52-week range, well down from the $43.95 high. At this point, with many investor disappointed, the stock may have nowhere to go but up. Counterintuitive, but perhaps true.

Douglas A. McIntyre can be reached at He does not own shares in companies that he writes about.

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