Home Depot Faces Brutal Headwind After CFO's Tariff Comments
Home Depot might seem to have an advantage over Walmart but a closer look suggests otherwise.
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Walmart WMT stirred up some controversy recently when it declared that it would likely raise prices to account for the effect of tariffs. President Trump responded with his now-infamous “eat the tariffs” comment, indicating that Walmart and other retailers should absorb any tariff-related costs.
On Tuesday, Home Depot HD indicated that it wouldn’t raise prices on most items due to tariffs. The Atlanta-based home improvement retailer did say that tariffs may cause it to discontinue some individual items.
Walmart Vs. Home Depot
It’s not difficult to understand the impact that tariffs could have on Walmart’s business. According to The Economic Times, about 60% of the world’s largest retailer’s imports are sourced from China. India and Vietnam are also key sources for the goods on Walmart’s shelves.
But Home Depot’s situation is not similar to that of Walmart. Richard McPhail, Home Depot’s chief financial officer, says the company sources more than half of its products from the U.S., making tariffs a much less significant factor.
When we compare these two big-box retailers, it’s fair to say that tariffs are a greater concern for Walmart when compared to Home Depot. You could say that, when it comes to eating tariffs, there’s a lot more on Walmart’s plate.
Charts Tell a Surprising Tale
Based on Home Depot's advantageous position in regard to tariffs, you'd think that stock would be the better buy. However, the charts tell a different story.
Walmart is trading above its 50-day (blue) and 200-day (red) moving averages. Walmart’s chart has formed an inverted head and shoulders pattern (shaded yellow), which projects the stock to the $120 area.
Home Depot popped after reporting earnings on Tuesday morning. The stock gapped right into its 200-day moving average (red), where it was rejected on heavy volume (arrow).
It was all downhill after the open, as Home Depot shares fell by 0.6% on the day.
Certainly, there is more at play here than just tariffs. If the recent rally in treasury interest rates continues, it's likely to have a detrimental impact on an already weak housing market.
High rates could become a headwind for Home Depot, Lowe’s LOW and other home improvement centers. That's reflected in the current price action of these stocks.
Treasury yields influence mortgage rates. If the yield on the 10-year treasury climbs above 5%, the rate on a 30-year fixed rate mortgage could top 7.5%. This would shut out prospective home buyers, who are already dealing with near-record housing prices in many areas.
At the time of publication, Ponsi was long WM.
