Home Depot: Buy, Sell, or Hold?

Home Depot (NYSE: HD) has been one of the best-performing stocks of all time. The home improvement retailer went public early in its history, in 1981, and has soared since then, turning $1,000 into more than $1 million.

However, more recently, Home Depot has struggled along with the broader housing market and home improvement retail segments.Is Home Depot a buy today? To answer that question, let's take a look at the buy, sell, and hold cases for the stock.

Image source: Home Depot.

Buy Home Depot stock

While Home Depot is down from its all-time high, the company still enjoys a number of competitive advantages that should help it deliver solid long-term returns.

First, Home Depot more or less competes in a duopoly with Lowe's in home improvement retail. It's an industry with high barriers to entry and relatively little competition.

The lack of competition and Home Depot's business model -- which carries a large number of SKUs and targets customer loyalty in the do-it-yourself (DIY) and pro segments -- has earned it high-operating margins, which reached 14% in the first quarter, an impressive rate for a retailer.

However, the best reason to buy Home Depot stock now is probably that the sluggish housing market is likely to start recovering soon. That's because the Federal Reserve is expected to start lowering interest rates in September, which should provide some relief to weary homebuyers tired of 7% mortgage rates.

Lower rates will also encourage homebuilders to build more as it will lower the cost of borrowing and make it easier for Americans to tap into a home equity line of credit to do renovations.

A year from now, borrowing rates could be significantly lower, driving Home Depot's growth and lifting the stock.

Sell Home Depot stock

Home Depot has evident competitive advantages in its business, but the company is still dependent on economic growth as it's a highly cyclical stock.

That means that any economic weakness could spoil its recovery. While the economy has been resilient in recent years, the labor market is cooling off, and the unemployment rate is ticking up. Some investors believe the stock market is overheated on AI hype and are calling for a pullback, which could also drag the economy down.

Another reason to sell Home Depot stock is its valuation, which is not cheap. The stock currently trades at a price-to-earnings (P/E) ratio of 24, which looks expensive for a company that just reported declining revenue in its latest quarter. By comparison, Alphabet trades at the same P/E ratio, and that company is growing revenue and profits by double digits.

Hold Home Depot stock

There's still a lot of uncertainty in the housing market right now, and that is likely to make Home Depot volatile. Home sales remain unusually slow, prices are elevated, and mortgage rates are high.

It's unclear how long it will remain that way, but the best thing for investors could be to wait out the current period until there's more visibility into the Fed's rate-cut trajectory and the housing market recovery.

What's the verdict?

Home Depot is facing a number of challenges today, but I think investors who buy the stock now will be rewarded in a few years.

Business should pick up as the housing market comes back, which will eventually happen, and the company has demonstrated smart financial management, spending money on share buybacks and investing in the business. Meanwhile, its acquisition of SRS Distribution opens a new vertical in building supply and should help it with the pro market.

It may still take time for Home Depot to build momentum, but buying the stock looks like the best move right now.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Home Depot. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy .