A gain of 28.40% in 2019 for shares of Home Depot, Inc. (HD) tells a story of big demand. This demand is likely big buying in the shares. It’s bullish activity because the shares are heading higher on increasing volumes, indicating a buyer is involved.
Smart money managers are always looking to bet on the next outlier stocks…the best in class. For Mapsignals, it’s not enough to look at technicals and fundamentals alone. The key lies in the demand for shares. I’ll go into the fundamental picture later, but the true tell on the near-term trajectory of a stock lies in the trading activity of the stock. Simply put, it’s all about supply and demand. When demand is higher than supply, the stock rises. When demand is lower than supply, stocks fall. For 2019, HD has seen strong demand.
For Mapsignals, when we look for an entry on a leading stock, we want to see an increase of potential buying. Just to show you what our unusual trading activity signal looks like, have a look at all of the UI (unusual institutional) signals HD has made the last year. Focusing on 2019, you can see a lot of buy signals (green) which lines up with a lift in the shares. This is exactly the kind of setup we look for at our research firm. We want to bet on the likeliest candidates heading higher. We want an edge. Stocks move based on supply and demand. This is a chart of big demand:
So far in 2019, HD has logged 7 unusually high-volume days, indicative of buying in the shares (see chart above). This demand can quietly lift shares. It’s been happening recently as well. These data points suggest demand for the stock is increasing. If you are going to make a bet on the direction of the stock, it is prudent to pay attention to how the stock’s shares are trading. Just like you don’t want to fight the trend, you also do not want to fight a stock that shows increasing price alongside big demand for the shares. Someone could potentially be accumulating a position.
Mapsignals’ goal is to identify tomorrow’s top stocks today. We’re basically looking for outlier companies with healthy fundamentals accompanied by outsized unusual institutional trading activity. We are looking for the big money. Big money moves stocks. By studying these data points we can make an educated guess as to which equities institutions are trafficking in and marry this information with fundamentally sound companies. We want the odds on our side when looking for the highest quality stocks.
When we decide on a strong candidate, we consider leaders that have a history of technical outperformance. When they show leadership, we see these as opportunities. Below are a few areas that grab our attention:
- YTD outperformance vs. market (+13.37% vs. SPY)
- YTD outperformance vs. Discretionary ETF (+9.94% vs. XLY)
- Recent big buy signals
Now, we take it a step further and score the best stocks showing unusual trading activity. Below you can see the historical times since 2015 when HD made buy signals for Mapsignals. These are the highest rated signals in our stock universe. What jumps out in the below chart is how the stock ramped up after big buy signals occurred. The recent green could be showing this same precursor to higher prices ahead. Below is the chart of all HD buy signals since 2015:
On top of a technical picture that is strong, one should also look under the hood to see if the fundamental picture supports a long-term investment. As you can see, Home Depot’s latest earnings report showed growth:
- Q2 2019 revenue growth rate +1.2% vs. the prior year
- Q2 2019 diluted EPS growth rate +3.9% the prior year
Home Depot shares are breaking out to highs with big demand. The company has a rich history of outperformance and it appears that big money is buying the shares. We like the long-term story of the stock. We are always on the lookout for great companies showing big buy activity in the shares. Even with the China trade spat, the company is still showing relative outperformance. The best companies in a group tend to out-perform over the long run. All of this points to a long-term opportunity for the stock.
The Bottom Line
HD is breaking out quietly. Our big buying indicator is signaling that we should take notice. Shares could be positioned for more upside. Given the lift in price, big buy demand, and healthy fundamentals, this stock could be worth a spot in a dividend-growth oriented portfolio.
Disclosure: the author holds a long position in HD at the time of publication.