HD: A Pick that Bill Miller & Peter Lynch Would Love

There is no arguing that Home Depot has been ugly...VERY UGLY. The chart below indicates that HD has dropped so quickly that its current levels of $34-$35 bucks are significantly below the 50-day and 200-day moving averages and about 25% off the company's 52-week high of almost $44.



Well, Home Depot has popped up on a lot of my stock "sources" recently and I thought that it may be time to consider it as a great company with a strong "margin of safety" built-in at these levels.

Just this week, Home Depot has been mentioned in association with two of the best stock pickers of our time.

First, Bill Miller mentions HD in this five-part series on Motley Fool.

Home Depot (NYSE: HD) is a stock Miller owns. He summarized recent company developments, which include negative sentiment on CEO Bob Nardelli and a stock that has stunk over the past five years. Yet the company is performing soundly from an operational and financial standpoint. I asked him whether he was concerned that current and former employees are fuming at the company, as are a number of shareholders, because of the annual meeting debacle. He detailed that Jack Welch stated that he considers Nardelli one of the most astute operators out there, but that doesn't mean he isn't susceptible to public relations disasters, as the market just witnessed.

Additionally, today the stock was featured in a screen on Forbes.

After retiring, Lynch wrote One Up on Wall Street, which became a best seller when it came out in 1990; it was reissued in 2000. The strategy I use is based on Lynch's book.

The Lynch strategy categorizes companies as fast growers (those whose earnings have grown 20% or more per year for the last three years), stalwarts (growth of 10% to less than 20%) and slow growers (less than 10% growth).

Next, it looks at the ratio Lynch made famous: the P/E/G ratio, which is the price-to-earnings ratio relative to growth. It generally wants to see this at 1.0 or less, with 0.5 or less considered best. Depending on the growth classification a company falls in, the strategy has different requirements. For example, with a fast grower, the P/E needs to be below 40, inventory should increase at about the same rate at sales and earnings per share should be growing at 20% to 50% a year. With stalwarts, the P/E/G ratio is yield-adjusted, EPS must be positive and equity must be at least ten times debt. Slow growers must be larger companies, and the stock"s yield must be higher than the S&P 500's yield.

Let's look at five stocks the Lynch strategy thinks are worth considering today.

Home Depot. This home-improvement retailing giant is a favorite of the Lynch strategy. Home Depot's P/E/G is a solid 0.60, its P/E is a low 12.16, and its EPS growth rate is a robust 20.2%. Plus, its equity is better than four times its debt, indicating that the company is financially strong.