By Rick Aristotle Munarriz (TMF Edible)
February 9, 2000

Bill has raised some great points, as he usually does, so I guess I better strap on that signature orange apron and get to work here. I'm surprised to see that we shared many trains of thought -- bringing up the Rule Maker Portfolio and even singling out the same leading retailers.

As expected, beyond that, our trains derail. He is banking on the fact that "the kind of money that's flashing around the economy these days" will last forever when the Federal Reserve won't lay off the rate-hike trigger until those days are gone. Home Depot isn't the only one to cash in on the 1990's home trend. Pier One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PIR)") else Response.Write("(NYSE: PIR)") end if %> had the same 11% growth in same-store sales that Home Depot did last quarter. However, the market is slapping just a P/E of 13 on that housing boom beneficiary.

Bill raves about Home Depot's improving balance sheet, but probably one of the main reasons for the extra cash is the company is running out of places to spend it. Want proof? Check out Home Depot's list of upcoming stores. Look it over and ask yourself why a company would be building huge warehouse stores in places like Neptune City, New Jersey (population: 5000) and Surprise, Arizona (population: 7000). Next month, Salem, Massachusetts gets a store. Gee, what a killing Home Depot would've made there back in the 17th century when they were burning witches at the stake.

What happens when a company devoted to helping builders can't build itself any longer?

I'll tell you. That buzzsaw that gets taken to growth projections will begin carving up the share price. It's a confusing time, I know. Here we are, coming off two great decades of expansion, while the company is wondering if the 4000 residents of Baxter, Minnesota will take a shine to the new store there next month.

Bill is a bit confused, too. In back-to-back sentences he writes how growth shows "no signs of slowing" while conceding that analysts expect a slowdown. What? If, like me, he has spent the last few days staring at blinding blasts of orange, I'll allow him the contradiction.

However, I won't allow him to extrapolate yesterday into tomorrow. It was a great run. Nice. But just because the stock outgained Gap Inc. in the past doesn't make it a better company or a better investment going forward. Gap's margins average about 50% higher than Home Depot's. If Bill wants to sidestep valuation in the name of quality, which I can't condone to begin with, at least consider the quality of the future. Higher rates. Tighter space. This orange tree won't grow forever.

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