Think about buying Home Depot (HD 0.87%) Stock? Interested investors are certainly faced with a bit of a conundrum at the moment. Although the shares may still be below their pandemic-related highs of late 2021, they have also risen 30% since their lows in October. With a forward price-to-earnings ratio (P/E) of 24, they are also valued quite highly. That is well above the long-term norm for this ticker.

Is it too late to buy Home Depot stock?

If you are a true long-term investor: No, it is not.

Home Depot still shows warning signs

To say the company is sending mixed messages here would be an understatement. Take last quarter’s numbers as an example. Both revenue and profit were better than expected. However, sales growth was muted, and store sales actually fell 3.3% year-over-year. Earnings per share of $4.67 beat estimates of $4.53, but fell for the sixth consecutive quarter.

HD sales data (quarterly) from YCharts.

The home improvement retailer also cut its full-year earnings forecast. It now expects a decline of between 1% and 3% compared to last year, with store sales likely to fall between 3% and 4% in 2024. The reason for the weakness? There are no surprises here. CEO Ted Decker explains: “During the quarter, higher interest rates and greater macroeconomic uncertainty put pressure on consumer demand in general, leading to lower spending on home improvement projects.”

Even though interest rates are slowly falling, macroeconomic uncertainty remains palpable.

However, stocks often reflect the likely future of the underlying business rather than its present. That’s why Home Depot shares have been much more bullish than bearish since their low point in October of last year, despite lackluster quarterly reports in the interim. The current economic challenges will eventually subside, allowing this retailer to regain its usual strength.

The question is: Given the relatively high valuation of this stock, isn’t the market at least a little overextended?

Probably not.

Better days are coming

Not everyone agrees with this reasoning, to be clear. The current analyst consensus price target is $381 per share, which is only 5% above the stock’s current price. That’s not much constructive support.

Consumption is predictably cyclical, although many investors (and analysts) don’t predict recoveries until they become obvious. Then it doesn’t matter much. The stocks that benefit from such economic recoveries are often well into a big long-term run, with too many people missing the early – and best – part of the opportunity. This is why Home Depot shares have actually performed so well recently when it seems they shouldn’t have. Investors are simply trying to avoid this potential mistake.

The thing is, these buyers have good reasons to be bold.

Take the real estate market, for example. Sales of existing and newly built homes are both still near multi-year lows reached only in recent years. Higher interest rates and even higher real estate prices are holding back purchases.

However, it is likely that both will recover soon.

The market is betting that the federal funds rate will be cut by at least four quarter points by early next year, which will drag mortgage rates down accordingly. Although home values ​​may fall sharply by then, a Realtor.com outlook suggests that price increases should moderate from here on out as single-family home construction increases and the supply of homes for sale increases by 14.5%.

Renovation activity is also poised to rebound. Harvard University’s Joint Center for Housing Studies expects renovation spending to continue to decline through early next year, but then stabilize on the way to a recovery in the second half of 2025. At the same time, new home sales, though far from robust, are expected to start picking up again from now on.

In other words, a large part of Home Depot’s business that is currently missing – namely construction and renovation work – will soon be restored.

Then there is the broader economic recovery, which should boost Home Depot’s business outside of construction. Although unemployment may be rising now while GDP growth is slowing, the Federal Reserve still expects GDP growth in 2025 and 2026 to more or less match the muted but positive growth seen this year. Home Depot can gain market share even against a backdrop of muted economic growth. In fact, Bank of America Analysts Robert Ohmen and Molly Baum recently wrote: “Although the macro picture remains turbulent, we expect further market share gains for HD as the company accelerates its growth and capabilities in the complex space.”

Look where it’s going, not where it’s been

To be clear, Home Depot is certainly not the safest stock to buy. still the cheapest. It carries above-average risk at an above-average valuation.

However, this is a case where the retailer’s sheer size and resulting transparency make it easy to make a judgment call about the company’s foreseeable future. While it’s not clear exactly when we’ll see more tailwinds than headwinds, the market correctly understands that we’re likely to see it sooner or later. It’s better to position yourself for that recovery early than wait and end up missing out. After all, stock prices tend to move on a forward-looking basis.

To reiterate, no, it’s not too late to buy Home Depot stock, even if it’s a little expensive. Soon, it will be able to work its way up to a fairer valuation.