Best Blue Chip for This Holiday Season

Since touching a record high of $215.43 in mid-September, the shares of blue chip Home Depot (HD) have pulled back with the broader stock market, with losses likely exacerbated by concerns about the housing market. However, now could be an opportune time to jump in on seasonal tailwinds for HD, if recent history is any guide, as it’s been among the best retail stocks to own in the holiday season. The stock will likely have to snap its recent streak of post-earnings declines, though, with third-quarter figures due out next week.

According to Schaeffer’s Senior Quantitative Analyst Rocky White, Home Depot has ended the November-December period higher 90% of the time over the past 10 years — the only Dow stock on the list with that bragging right. Further, HD has averaged a gain of 8.91% during this two-month stretch.

Since the aforementioned September peak, Home Depot shares have dropped about 14% to trade at $185.63. From a longer-term standpoint, though, HD has been in rally mode since mid-2011, with the 100-week moving average containing pullbacks since late 2015. From current levels, another 8.91% surge into 2019 would place the blue chip back above the round-number $200 level to start the new year.

Home Depot is set to report earnings before the open on Tuesday, Nov. 13. As alluded to earlier, HD has moved lower the session after its last three earnings reports. However, the shares gained 1.6% after the company’s report this time one year ago.

On average, HD has moved 1.4% in the session after its last eight earnings reports, regardless of direction. This time around, implied volatility (IV) data indicates options are pricing in a one-day reaction of 4.6% for the stock — more than three times the norm. Option buyers will be happy to note that the equity’s Schaeffer’s Volatility Scorecard (SVS) comes in at a healthy 92 out of a possible 100, meaning HD has handily exceeded options players’ volatility expectations in the past year.

Traders who want to capitalize on potential end-of-year tailwinds for HD, but who are nervous about earnings, may want to wait until after the blue chip reports next week to speculate. The anticipated post-earnings volatility crush should make HD options much less expensive; with a potential volatility catalyst on the horizon, short-term option premiums are rich. The equity’s 30-day at-the-money IV sits at 23.6%, in the 85th percentile of its annual range.