An underwhelming 2025

I’m referring to The Home Depot (NYSE:HD). The largest home improvement retailer in the US operates a fairly simple business model of supplying products to DIY homeowners and professionals. Yet it might surprise some to note that the share price has fallen by 11% over the past year!

The move lower is partly justified by the slow US housing market. Interest rates have stayed higher for longer, meaning mortgage rates haven’t fallen as much this year as many expected. Further, the miss versus expectations in quarterly earnings was “primarily due to the lack of storms in the third quarter, which resulted in greater than expected pressure in certain categories.”

As a result, I don’t think many are that optimistic about the stock as we hit 2026. This makes it a dark horse in my book, because I think there are several reasons why the business can do much better than people expect.

Why 2026 could be positive

The latest quarterly results from November still provided guidance for a full-year total sales growth of 3%. This tells me that despite short-term headwinds, the overall business operations are very robust. Factors like storms (or weather more broadly) aren’t a negative drag for a year or more.

A big factor that could help the US stock in 2026 is lower interest rates. The current Federal Reserve chair is due to step down in the spring, with his likely successor pushing for interest rates to be cut at a faster rate. If mortgage rates decline as a result, housing turnover should follow. From there, remodelling and home improvement spending often increase, which traditionally is a big demand spike for Home Depot’s business.

Finally, the company is diversifying operations thanks to the recent acquisition of GMS back in September. GMS serves the trades sector much more. So, the shift toward professional customers (offering larger, repeat purchases) could deliver steadier earnings growth than relying only on DIY homeowner spending.

The bottom line

When I look at other constituents of the Dow Jones, I think Home Depot could be a strong performer in 2026. It hasn’t been caught up in the AI hype, with lofty valuations. Although the slow housing market is an ongoing risk, I think chatter about lower interest rates could provide a catalyst for the stock to rally hard later in the year. As a result, I think it’s a stock for investors to consider who are looking for US exposure to their portfolios.

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The recent price decline only takes the edge off what has been a generally impressive run for the stock, though. Despite this year’s drop, Home Depot shares are still 91% higher than they were five years ago.

I think that Home Depot might be a great addition to my portfolio, but I’m not buying them right now. Here’s why.

Business overview

Home Depot is a home improvement retailer, a bit like B&Q in the UK. The company sells various home and garden improvement products, rents equipment, and provides installation services.

Around 91% of Home Depot’s revenue comes from the US (this will be important later). In addition to DIY enthusiasts, the company has initiatives dedicated to professional tradespeople.

Strengths

Since Home Depot is a retail company, I would typically expect to see narrow margins. But the company has a gross margin above 30% and profit margins in excess of 10%. 

Compared to its main rival Lowe’s (8.8%), UK-equivalent Kingfisher (6.4%), and retail giant Wal-Mart (2.3%), these profit margins are impressive. And the good news doesn’t stop there.

Over the last five years, Home Depot has grown its business impressively. Revenues have increased by around 60%, and expanding margins mean that net income has more than doubled.

In addition, the company is steadily lowering its outstanding share count, has its debt under control, and produces solid returns on its fixed assets. Overall, I think there’s a lot to like about Home Depot’s stock.

Headwinds

With all this, why am I not buying Home Depot shares right now? The answer has more to do with the macroeconomic situation in the US than the business itself.

Retail in the US is currently in a difficult period. Recently, Target announced that it had a huge inventory surplus that it was going to have to sell at a discount as demand for non-essential items had slowed down.

I don’t see Target’s issues as a result of poor management. Instead, I think they’re the result of issues that might well affect Home Depot.

Target has too much stock because it has had to buy in significant inventory to cope with supply constraints. Now, though, declining US consumer spending – especially on discretionary items – means it has more than it can cope with.

I’m concerned that other retailers, including Home Depot (which generates 91% of its revenue in the US), might find themselves confronted with similar difficulties. Even if they don’t face the same inventory problems, Home Depot’s sales might slow due to high inflation dampening demand.

At the moment, Home Depot stock trades at a price-to-earnings (P/E) ratio of 19, which is a touch higher than the S&P 500 average. At that level, I think that the company is priced for continued growth, rather than a short-term headwind. 

As a result, my plan is to see how Home Depot’s business fares over the next few months. If its earnings fall and the stock drops, I’ll be looking at making an investment.

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As such, here are three US stocks I would buy for my portfolio in 2022. 

US stocks to buy for growth 

Google’s parent company, Alphabet (NASDAQ: GOOG), is one of the world’s largest technology corporations. It has built its brand over the past two decades through the Google search engine, but today, the establishment is far more than a web portal. 

Alphabet owns cloud computing assets, a hardware and software business, and has a portfolio of startup bets. Together, these assets suggest that the business is built for whatever the world throws at it.

They also indicate to me that this company is one of the best ways to invest in the growth of the global internet infrastructure. As the technology sector continues to boom, the business should reap the benefits. 

These are the main reasons I would buy the shares for my portfolio for 2022 and beyond.

Some challenges it could face include regulatory headwinds, which could force the breakup of the business. This is the worst-case scenario. 

DIY giant

Home Depot (NYSE: HD) has been one of the big winners of the pandemic. Stuck-at-home consumers have flocked to the firm’s stores to purchase tools and equipment for DIY projects. And even though the world has opened up over the past few months, the US retailer’s sales have continued to grow. 

The retailer reported $36.8bn in sales during the fiscal quarter to the end of October, representing a 9.8% increase compared to the year-ago period. Moreover, big-ticket transactions of more than $1,000 were up 18% year-on-year, giving the company’s net profit margin a big leg up to 11.2%, from 10.2%. 

Considering these figures, I think the company is one of the best US stocks to buy in 2022 as it builds on the growth of the past few years. As we advance, challenges it could face include higher wage costs and other inflationary pressures, which could hurt revenue growth and increase costs. 

Global pharma champion 

Pfizer (NYSE: PFE) is one of the largest pharmaceutical companies in the world. Today, it is best known for its Covid-19 vaccine, which is generating billions in sales for the group. 

But there is far more to this business than its vaccine division. It has a vast portfolio of treatments both on sale and under development, which will add support to the company’s growth in the future.

What’s more, the company should be able to use the profits from its Covid vaccine sales to invest in additional research and development projects. 

Pfizer has plenty of other attractive qualities as well. The group has a robust balance sheet and a dividend yield of 2.6%, at the time of writing. Management has also distributed large amounts of capital to investors in the past with share repurchase. 

Unfortunately, despite these qualities, the company’s success is not guaranteed. It will face challenges, including regulatory headwinds and competition in its drug markets. These could increase costs for the group, reducing profit margins. 

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If I imagine the cash I have is other people’s money? It makes me less likely to take crazy risks. 

Sure, some risk is necessary. I feel I can’t go through life never taking a leap of faith. But having strict risk management in place means I’m less likely to blow up my account. I don’t like the thought of having to start all over again at my age. 

I’ve built up a nice amount of cash from investing over the past few years. I want to leverage those gains to keep growing my pot for retirement. 

My investing role model

Peter Lynch is the model value investor. A voracious researcher, he created $14bn in wealth in his time as fund manager of Magellan at Fidelity. By taking his lessons from a lifetime of investing to get rich, I think I can maximise my gains. That will make the most of the modest amount of capital I have to invest. 

I know I will only have a few hundred pounds, or maybe a thousand at most, to invest in the markets at any one time. I have a family and responsibilities to take care of. So I can’t go throwing fortunes into stocks and shares every month.

Thankfully, Peter Lynch has the knowledge I need to take full advantage of the money I do have.  

Run my winners

Just because a stock has gone up a lot, doesn’t mean it can’t continue growing. Lynch says: “Your great mistakes are selling a good company, and it doubles and triples and quadruples. I sold Toys R Us way too early, it went up 20-fold after I sold it. I did the same with Home Depot. Those are probably the two greatest mistakes I ever made.” 

Track my progress

Scientists are always testing and measuring their results. I have a better chance to get rich if I can think like a scientist. Physically keeping a journal or diary and writing down the reasons for buying a stock makes it more real, says Lynch. It helps to keep the mind focused on the long term. And it also helps tan investor avoid selling too early. 

“You have to say to yourself: ‘In this stock, I have a 10-year story, a 20-year story’,” Lynch says. Having details written down in black and white? It makes my path easier to follow. 

Focus on the earnings

Peter Lynch didn’t buy unprofitable companies to get rich. I could sit for years holding a company that’s making no money in the vain hope it will one day turn around. Why buy a business making zero pounds of profit? When there are so many out there already pulling in buckets of cash and returning excess profits as dividends?

Because I manage my family’s investing portfolio, I’m under the exact same pressure as a billion-pound fund manager like Peter Lynch.  The scale may be different, but the philosophy is exactly the same. We all want to come out at the end with more money than we went in with! And that’s where the Peter Lynch philosophy really starts to shine. 

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European markets fell this morning, as investors watched Asian markets close lower, and sold off mining and financial stocks. At 7am ET, the FTSE 100 was down 0.58%, the DAX was down 0.97% and the CAC 40 was down 1.31%. There was little in the way of economic news from the UK or eurozone, although figures published today showed that construction activity rose by 0.7% in the eurozone in June, following a 0.5% increase in May.

No major US economic reports are due today, but tomorrow’s publication of the latest Federal Open Market Committee (FOMC) minutes continues to cast a shadow over the markets, which is unlikely to be lifted by any positive earnings reports.

On a regular day, news that The Home Depot (NYSE: HD.US) beat expectations, with a 9% increase in second-quarter revenues, and a 23% increase in second-quarter earnings, would probably receive a more positive reception than it will today. The home improvement retailer is seen as a key beneficiary of the US housing recovery, and reported second-quarter earnings of $1.24 per share this morning, beating analysts’ consensus forecasts for $1.21 per share. Home Depot’s share price was up by 2.7% in pre-market trading, following publication of its results.

At 7.30am ET, J.C. Penney is expected to report a second-quarter loss of $1.07 per share. Other companies scheduled to report earnings before markets open this morning include Medtronic, Barnes & Noble, TJX and Best Buy Co, which is expected to report second-quarter earnings of $0.11 per share. Stocks that may be actively traded when markets open include Urban Outfitters, which rose by almost 7% in after-hours trading last night, after investors were impressed by the retailer’s rising profit margins.

Finally, let’s not forget the Dow’s daily movements can add up to some serious long-term gains. Indeed, Warren Buffett recently wrote: “The Dow advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions.“

If you, like Buffett, are convinced about the long-term power of the Dow, you should read “5 Stocks To Retire On“. Your long-term wealth could be transformed, even in this uncertain economy. Simply click here now to download this free, no-obligation report.

Roland does not own shares in any of the companies mentioned in this article.

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