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Dear Mr. Berko:

Dear W.P.:

Most folks define common sense as being able to see clearly what’s in front of your eyes. But I define common sense as the capacity to see clearly what is in front of another person’s eyes.

In the eyes of that other person, I see him buying a new bathroom sink, roofing materials, appliances, windows, etc. In that other person’s eyes I can see that he can’t sell his house, and that it’s a lot cheaper to remodel his current home than buy a new one. His spouse wants a second bath or half-bath, or new doors, new appliances, or a family room or a pool, etc. And there are a lot of unemployed skilled carpenters, electricians, plumbers, etc. who will do that work for a lot less than they would have billed 18 months ago. In many cases, the husband has enough skills to complete much of the work himself. So that translates into higher revenues as well as improved earnings for The Home Depot Inc. (HD-$28.38) and for Lowe’s Cos. Inc. (LOW-$24.53). This improvement won’t be a dramatic change; rather it will be slow and deliberate.

One of the best things to happen to HD was the departure of Robert Nardelli, the bane of most store managers in the Home Depot chain of 2,200 locations. Nardelli’s management style didn’t go over well with the HD people, and he was kinda asked to resign. He did in January 2007, and by August he found himself a position as chief executive officer of Chrysler. Ah … those poor Chryslerites; they’re going to be in for a brutal awakening as he garrotes most of the administrative staff.

The next best thing to happen to HD is Frank Blake, its new chairman and CEO. I’m told that Blake has “heart and common sense.” Blake sold HD Supply for $9 billion (good riddance) and will use those funds to repurchase outstanding shares. Blake is also backing the company’s commitment to the retail customer via aggressive reinvestment in stores. HD is upgrading its units, refining its supply chain, adding full-time sales help, recruiting skilled trade specialists and working hard to improve customer service. These are things that Nardelli considered unimportant. Yep! That’s right!

Home Depot is the largest and some say the best home improvement retailer south of the North Pole. Management is adding some rather exclusive and fascinating merchandise that will impressively separate itself from other retailers. HD’s installation business is expanding quite nicely, and its multilevel stores in urban locations like New York City and Chicago have been producing impressive results.

Revenues for this year should improve by about 3 percent to $81 billion, and earnings may increase 20 percent to $2.71 a share from last year’s $2.30.

Even though I don’t see a strong increase in revenues, I do see a good increase in earnings as Blake wisely improves upon HD’s efficiencies. Home Depot has an impressive cash flow that supports continued dividend increases and will assist the new CEO in funding a large share buyback program.

Meanwhile, there are six “strong buy” recommendations on HD; however, considering the names, I don’t trust the methods they used — though I do agree with their conclusions.

I would buy another 600 shares of HD at today’s price, then wait 31 days, sell the 600 you purchased at $39 and take a tax loss. This will give you a new basis of $28.38. And in the coming three to four years I would think HD could trade in the high $50s to low $60s.

Meanwhile, I like American Funds with its excellent management team. It’s among the top performing fund groups and has a superb long-term performance record.

But I’m not comfortable with its 5 percent commission costs. There are no-load funds with similar to better records that I’d more readily recommend. The Bruce Fund, several funds in the Fidelity Group, T. Rowe Price Group and Dodge & Cox, to name a few.

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