HD Supply, Short On Glamor, Long On Growth Potential, Yes On Value

Value investors today’s momentum-driven stock market can’t just look for low ratios. We need ratios that are low among a list pre-qualified to include only bona fide growth plays. Shares of building supply distributor HD Supply (HDS), after having shaken off its M&A-private-equity driven youth, now fills the bill as the company now takes aim at the fragmented but growing market for maintenance of residential, hospitality and healthcare facilities.

Why This Stock Is Being Considered

It’s important before you start to read about or evaluate a stock, to know why it came under consideration and be comfortable soundness of those reasons. HD Supply Holdings (HDS), got into my radar as a result of the Goldilocks Value screen I created on Portfolio123 that looks for stocks with relatively low valuation metrics but only from a universe that has been prequalified to include situations benefitting from the strong momentum Mr. Market cherishes nowadays. Details of the approach are described in a 6/27/18 blog post.

A Different Kind Of Value Stock

At first glance, buildings-supplies distributor HD doesn’t look like any sort of value stock at all.

Table 1

Don’t freak out over the Trailing 12 Months P/E; that’s influenced by unusual items that impacted recent results, something that occurs often and makes trailing 12 months P/Es the least useful in my opinion. Price/Book is likewise a bit of an oddity, due to the way the company’s history impacted its equity tally (see below). The other items, the ones that paint a more normal picture, are OK on balance, but nothing special.

What is interesting is the screen that pre-qualified the list of stocks I ranked as possible value candidates. As noted above and explained a 6/27/18 blog post, the list is limited to companies about which the Street is optimistic. 

Table 2, which shows the recent trend of estimate revisions, tells us that analysts have become more optimistic about upcoming prospects; not spectacularly so by any means, but enough so to bring HD out of the great “all else being equal” that would be needed if we were to suggest that lower valuation ratios per se are always for the best. 

Table 2

Table 3 shows indications of how the investment community (not the analysts, but those who do the actual buying and selling of shares) feel about HD.

Table 3

Short Interest, as a percent of the float and as expressed in terms of how many days it would take for short sellers to cover their positions at recent levels of trading volume, is slightly below those of peers. Key technical indicators, however, as well as recent share price performance data, suggest HD has been in favor among buyers.