Dear Mr. Berko:

In 2000 I paid $63 for 200 shares of Home Depot plus a $160 commission for lousy advice from my broker. As you know, the stock has been a lousy performer for the past six years. What’s wrong with the company? It continues to set new records each year, but the share price seems to suggest that something’s very wrong with the stock.

S.L., Wilmington, N.C.

Dear S.L.:

I like Home Depot Inc. (HD-$33.26). I like the way it smells. I like the way it feels. I like the layout, the people, the scruffy floors, the noises and the busy parking lots.

I’ve always liked HD. In fact, I’ve liked HD since I bought my first 100 shares in 1994 at $36. I’ve had four splits along the way and until June I owned 600 shares. I sold the stock because despite rising revenues, rising earnings, rising dividends and rising free cash flow, the share price behaves as if it’s walking underwater … backward!

The consensus indicates that revenues will rise from $82 billion in 2005 to $112 billion by 2008. That’s power! The consensus indicates that 2005 earnings of $2.72 per share and 2005 dividends of 40 cents per share will rise to $3.70 and 80 cents, respectively, by 2008. That’s power, too! Cash flow is expected to rise from $2.69 per share to $3.90 by 2008, and that kind of near exponential growth is difficult to match.

Yet the shares are sinking slowly like a penny in a vat of molasses. Well, sometimes the shares of big, successful companies that remain big, successful companies get kind of arthritic and just can’t go anywhere.

Consider Wal-Mart Stores Inc. Since Sam Walton passed away, its stock can’t get off the dime. Microsoft Corp. has continued to increase its revenues and dividend since Bill Gates left the fold, but the stock is nailed to the floor. Intel Corp., which under the guidance of founder Andrew Grove became the largest chip-maker with the best research and development, seems glued at less than $20 a share. Coca-Cola Co., under the chairmanship of Douglas Ivester, enjoyed good revenue and superb dividend growth, but today it trades on a short leash. General Electric Co. was unstoppable under the auspices of Jack Welch; when he left, the stock price got stuck in a rut. There are other blue and pale-blue chips whose share prices are disappointing their investors. It appears we must add Home Depot, which is no longer managed by its founder Arthur Blank, to that list of listless stocks.

Standard & Poor’s rates HD as a “strong” buy. Thomson Financial is hard-charging bullish on HD. Piper Jaffray ranks the company’s stock to “outperform.” Value Line calls HD “top-ranked.” The stock is on Merrill Lynch’s “buy” list, the Fidelity fund group owns 90 million shares, Vanguard owns 53 million shares and the Legg Mason group owns 62 million shares.

Yet the stock’s price performance really “sphinx.” Go figure. Brokerages recommending Coca-Cola, GE, Intel, Microsoft and Wal-Mart years ago still recommend those issues at lower prices. It’s amusing that the same brokerages that also recommended HD at higher prices still recommend HD today. I should have known worse.

HD’s ascendancy may be descending. Lowe’s Cos. Inc. (LOW-$28.10) might be transmitting better and stronger pheromones. LOW is attracting more women shoppers to its stores than HD and they’re the ones who make the major kitchen, bath and home-decorating decisions. Though Home Depot might sell more two-by-fours, it’s bathrooms, kitchens, carpets, lighting — the stuff that the ladies command — that have the high margins.

Also, Lowe’s attracts a more affluent clientele than Home Depot. These folks spend more money per purchase and are more likely to buy high-end merchandise.

A major brokerage analyst tells me that HD’s store growth is beginning to decline, gross margins are falling, return on total capital and on equity are waning, net profit margins are beginning to shrink, operating margins are narrowing and that these numbers are expected to maintain this direction over the coming three to four years. It might be a long time before Home Depot’s stock returns to the low $60s so you can break even. Take your loss.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

© Copley News Service