Home Depot - big improvement Shares in Home Depot have been on an absolute tear, returning 76 per cent over the past year. Among huge companies ($50bn or more in market capitalisation) worldwide, only AB InBev has performed better, and it has only done so by a point or so. Part of the story here is a delirious rally in anything remotely related to US housing: not just homebuilders but everyone from paint makers (Sherwin-Williams) to materials companies (Louisiana-Pacific) has rocketed. Home Depot has not simply enjoyed the tailwind, however. The improvement in its same-store sales growth (averaging 4.5 per cent over the past four quarters) has easily outpaced its rival home improvement supply chain, Lowe's. It has expanded margins and managed Wall Street expectations deftly, increasing its sales and earnings guidance with metronomic regularity. The valuation looks overheated on most metrics, though. It trades at 20 times forward earnings, very pricey for a highly cyclical retailer whose same-store sales growth decelerated in its most recent quarter, for the first time in more than a year. All the same, there are three arguments against selling. After suffering almost three years of same-store sales contraction between 2006 and 2009, the company may still have room to expand sales further. Its free cash flow yield, at 6 per cent, is still in line with peers. It also deserves a premium to other retailers (which trade on roughly 15 times earnings) because many of its products are too heavy or bulky for Amazon to deliver. All this is reassuring, but it will pay to consider whether the fundamental strength that led to its outperformance during a housing rally will provide downside protection should that rally turn into a rout. Might this be the right time to put your Home Depot profits to work on, say, that kitchen renovation you've been putting off since the housing crisis hit?