Not So Sweet Home: Buy Puts on Home Depot, Lowes and Central Garden and Pet

By Linda McDonough • August 8, 2018

The Trades:

NOTE: Home Depot reports earnings on August 14 before the open. It is important to execute these trades before the close on August 13.

Buy to open the October 19, 2018 put on Home Depot (NYSE:HD) with a strike price of $190 at $3.30 or lower. Symbol (HD181019P190)

Buy to open the October 19, 2018 put on Lowes Company (NYSE:LOW) with a strike price of $97.5 at $3.10 or lower. Symbol (LOW181019P97.5)

Buy to open the October 19, 2018 put on Central Garden and Pet (NSDQ:CENT) with a strike price of $40 at $1.35 or lower. Symbol (CENT181019P40)

Rationale:

Slowing new home builds due to labor shortages and rising material costs will hit the home improvement stores and their suppliers. Home Depot and Lowes’ fastest growing revenue segment is sales to professional contractors. As sales to this group slow, the stocks and their suppliers should get hit.

Home Depot (NYSE: HD)

Home Depot has shown a slowdown in sales growth despite easier comparisons. Analysts expectations for 7% revenue growth this quarter look ambitious. HD already missed comp sales estimates last quarter. Two in a row is not an outlier but the beginning of a trend.
Competitor Lowes missed revenue and earnings estimates on May 23, but investors took heart in management’s comment that May sales were up “double-digit” as of that date.
Management blamed the “unseasonal” cold spring. Although May sales likely benefited from a temporary return to warmer weather, extreme heat in much of the country may have cut that boost short.

Lowes (NYSE: LOW)

Lowes missed last quarter revenue and earnings estimates but investors gave it a pass due to a promise that May fared better.
Revenue growth has been slowing since they lapped purchase of RONA, a Canadian chain of home improvement stores. The first pure apples to apples sales comparison will be in November 2018 quarter.
Days of inventory has been creeping up last 3 quarters and is well above Home Depot’s level. Lowes has 104 days of inventory vs. Home Depot’s 78.
Operating income declined in the last two quarters.

Central Garden and Pet (NSDQ: CENT)

Cash flow has been declining.
Last two quarters showed a significant drop in product margins
Days Sales Outstanding (DSO), a measure of account receivable, has increased for four quarters. A long slow increase like this can indicate a company “stuffing” or over shipping to customers. Future growth suffers if this is the case.
Organic growth, or growth after adjusting for acquired companies, is flattening out.
Two of its largest customers are Home Depot and Petsmart, who are both seeing a slowdown in customer traffic.
Although Central Garden already reported its most recent quarter on August 1, I expect the stock to weaken due to a proposed secondary offering of stock. As investors dig through the prospectus, they may become more aware of the trends discussed here.

Stock Talk

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Paul

08/08/18 ‐ 10:30am ET August 8, 2018 at 10:30am ET

Filled all three at recommended prices.

Matt H

08/08/18 ‐ 11:03am ET August 8, 2018 at 11:03am ET

Got HD at 3.28, LOW at 3.10, looking to fill CENT at recommended price but for now the option is already more expensive. All with Fidelity

Rick Micoli

08/08/18 ‐ 11:06am ET August 8, 2018 at 11:06am ET

HD filled at 3.30
LOW @3.10
Still waiting for CENT

John N

08/08/18 ‐ 11:13am ET August 8, 2018 at 11:13am ET

LOW PUT @ $3.02
HD PUT @ $3.26
Waiting on CENT…

John N

08/09/18 ‐ 11:26am ET August 9, 2018 at 11:26am ET

CENT filled at $1.35 on 8/9

JoeJB

08/08/18 ‐ 11:13am ET August 8, 2018 at 11:13am ET

HD @ $3.24
LOW @ $3.02
CENT @ $1.40

Donald Lewis

08/08/18 ‐ 11:51am ET August 8, 2018 at 11:51am ET

Filled HD @ 3.20
LOW @ 2.95
Still waiting CENT Fidelity

Stanley

08/08/18 ‐ 11:58am ET August 8, 2018 at 11:58am ET

Low filled @ 2.98
Waiting on CENT

Linda McDonough

08/08/18 ‐ 11:59am ET August 8, 2018 at 11:59am ET

Just an FYI, CENT is not as heavily traded so be patient.

Jeff L.

08/08/18 ‐ 12:09pm ET August 8, 2018 at 12:09pm ET

Filled 2 out of 3 waiting on CENT currently 1.55. Thanks

Asjad Shamim

08/08/18 ‐ 12:09pm ET August 8, 2018 at 12:09pm ET

Filled below via Fidelity…
HD – $4.98 (including commission) using $195 as strike price
LOW – #3.13 (including commission)
CENT – Still waiting to be filled at recommended price

Mark F

08/08/18 ‐ 12:14pm ET August 8, 2018 at 12:14pm ET

HD @ 3.25
LOW @ 3.05

Claude

08/08/18 ‐ 12:37pm ET August 8, 2018 at 12:37pm ET

Low filled 3.00
HD filled 3.25

Daniel Long

08/08/18 ‐ 1:03pm ET August 8, 2018 at 1:03pm ET

LOW filled 3.10
HD filled 3.30
CENT waiting
Thanks.
DL

Ted

08/08/18 ‐ 1:56pm ET August 8, 2018 at 1:56pm ET

Filled HD @ 3.16 & LOW @ 3.05
Cent working.

Michael E

08/08/18 ‐ 2:22pm ET August 8, 2018 at 2:22pm ET

LOW FILLED@$3.07
Fidelity

Carl

08/08/18 ‐ 2:35pm ET August 8, 2018 at 2:35pm ET

LOW 97.50 PUT filled @ $3.10 on TOS

Thank You Linda

Carl

08/08/18 ‐ 3:19pm ET August 8, 2018 at 3:19pm ET

HD October $190 PUT filled on TOS for 3.30

Thank You Linda

Michael E

08/08/18 ‐ 3:21pm ET August 8, 2018 at 3:21pm ET

HD FILLED @ $3.30
Fidelity
Thanks Linda!

Prasanna Kumar Y R

08/09/18 ‐ 12:05am ET August 9, 2018 at 12:05am ET

Thanks Linda,

I already HD puts from last 3-4 weeks. I’ll increase some more.

What do you think of
https://marketrealist.com/2018/08/most-analysts-suggest-a-buy-for-home-depot-ahead-of-q2-earnings

Thanks,
Prasanna

Linda McDonough

08/09/18 ‐ 9:15am ET August 9, 2018 at 9:15am ET

Thanks for the link Prasanna.
In a perverse way, this is better news for the HD bear case. Analysts are pretty sanguine about a good quarter but when I work through the assumptions in the model, the revenue estimate looks aggressive. As always, I could be wrong.
Oddly when analysts are very pessimistic on a stock, it can have a “relief” rally even when missing numbers if they’re not as bad as expected.
Best,
Linda

DJ

08/09/18 ‐ 8:06am ET August 9, 2018 at 8:06am ET

HD filled at 3.10
LOW filled at 3:00
CENT waiting

Frank S.

08/09/18 ‐ 9:33am ET August 9, 2018 at 9:33am ET

CENT filled @$1.35 ND

Michael E

08/09/18 ‐ 10:23am ET August 9, 2018 at 10:23am ET

CENT Filled @$1.35
Fidelity

Asjad Shamim

08/09/18 ‐ 10:47am ET August 9, 2018 at 10:47am ET

CENT filled at $1.35 via Fidelity

Matt H

08/09/18 ‐ 11:29am ET August 9, 2018 at 11:29am ET

CENT filled @ 1.35 with fidelity

Ted

08/09/18 ‐ 11:31am ET August 9, 2018 at 11:31am ET

CENT filled @1.35 10:21am

Claude

08/09/18 ‐ 11:36am ET August 9, 2018 at 11:36am ET

CENT 1.35

KenRetiredSCAZ

08/09/18 ‐ 12:47pm ET August 9, 2018 at 12:47pm ET

Unusual occurance on both HD and LOW. I submitted limited orders for both trades and LOW 97.5 filled at 5:04 ET 8/8 @ $2.85 and HD 190 filled at 4:56 ET 8/8 @ $3.10. I had no knowledge (until today) that my account with TD Ameritrade could trade after hours. I DO NOT submit my order through ThinkorswiM. Thanks Linda, looking for good results out of these 2!

KennyO

08/09/18 ‐ 1:47pm ET August 9, 2018 at 1:47pm ET

Newbe here. What % of your portfolio do you allow for each trade? KennyO

TIM

08/10/18 ‐ 6:57am ET August 10, 2018 at 6:57am ET

CENT Oct 19 PUT @ $1.35
HD Oct 19 PUT @ $3.25
LOW Oct 19 PUT @ $2.86

Daniel Long

08/10/18 ‐ 9:47am ET August 10, 2018 at 9:47am ET

CENT BTO Oct 19 40 Put @ 1.35
Thanks.
DL

Jeff L.

08/13/18 ‐ 9:50am ET August 13, 2018 at 9:50am ET

Nice work on the 3 “PUTS” as they drop like a rock! any strike we should be looking at or let them run the course? CENT, HD, LOW thanks again Linda..

Linda McDonough

08/14/18 ‐ 8:32am ET August 14, 2018 at 8:32am ET

Hello all,
HD beat e.ps. by $.21 this morning with a slightly better than expected revenue number. The only holes I can find in the release are that the company raised annual guidance by only $.10 despite the $.21 beat. This might be due to pulling sales into the current quarter, delayed expenses that will be recognized later or simple conservatism.

The other potential cracks are that updated guidance includes the 53rd week and 6 billion in repurchases, two beneficial events that have not been mentioned in prior releases.
The all is at 9 AM. Currently, the stock is up $2 in premarket.

My instinct is that I was simply wrong, which is part of this business. It’s possible the stock doesn’t surge due to the factors I note above.
Best,
Linda

Prasanna Kumar Y R

08/14/18 ‐ 9:24am ET August 14, 2018 at 9:24am ET

Thanks Linda, for the heads up.
In the premarket, stock is flat.
Overall comparable-store sales increased 8% and U.S. comp sales came jumped 8.1%.
What is comparable store sales?

Linda McDonough

08/14/18 ‐ 9:51am ET August 14, 2018 at 9:51am ET

Comparable store sales are sales measured at each store versus how those stores did the prior year. It removes the growth from a company adding new stores and is considered a more accurate measure of how well a chain is performing.

Prasanna Kumar Y R

08/14/18 ‐ 9:57am ET August 14, 2018 at 9:57am ET

Thanks Linda, fortunately the stock down and put options are profitable.
I still don’t believe the sales published by home depot this quarter, since the sales were down compared to last year as I go to home depot regularly/weekly as a home owner and talk to to store managers. Couple of people work there mentioned the sales were little bit down compared to last year. I was struggling to get cart last year at the store entrance on the Saturday mornings because of the crowd, but this year the carts are always available and less crowd. There is something fishy about the sales reporting.

Matt H

08/14/18 ‐ 10:01am ET August 14, 2018 at 10:01am ET

Sold at 4.61 on Fidelity

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