Restoration Hardware (RH)

Restoration Hardware has been on my watch list for a long time. Believe it or not, I’ve been watching the stock for about a year—it was my Top Pick at the 2014 Cabot Investors Conference, nearly one year ago—and now, after a ton of starts and stops, shares look poised to get going. Here was my take on RH on July 13, 2015, when I recommended the stock in Cabot Top Ten Trader:

    “Restoration Hardware is usually thought of as another high-end retailer of home furnishings, but the stock is perched near all-time highs today because the story is far more enticing than that. The company has a one-of-a-kind business model, as it’s been closing its mall-based stores and instead focused on (a) huge, 50,000-foot (or larger!) showrooms in key cities across the country that can display a huge portion of the company’s high-end products, (b) gigantic once-a-year catalogs (called source books) and (c) vast partnerships and relationships with leading global designers.”

Combine all of that with a new concept or two each year—Restoration Hardware just announced a new Modern line of products that should appeal to an entirely new category of customers (it’s current line is mostly classic looking). That new line will have a 300-page source book of its own and a 15,000 square foot store in Los Angeles—and there’s reason to believe the company should enjoy healthy growth for many years to come.

Even in the midst of the firm’s transition to its huge showroom strategy, sales, earnings and profit margins are doing great and analysts see earnings up 32% this year, 25% next year, and more 20%-plus growth after that. It’s a unique retail story that has a lot to like.

Chart-wise, RH has had numerous runs to new price highs … but the move usually lasts just a week or two before it tucks its head back into its shell. That’s what’s kept me watching, and not buying, the stock for the better part of a year.

Now, however, I think the stock may have changed character. First, it reacted well to earnings in mid-June. Second, even after a dilutive convertible bond offering, shares held firm. And third, RH lifted to new highs on good volume as soon as the market bounced following the China/Greece mess.

RH has come down a few points during the market’s latest selloff, but as we saw a few weeks ago, the selling has been minor; the stock is still above its 25-day moving average. The bottom line is that the stock’s pullback, which coincides with the drop in growth stocks this week, appears normal.

Along with the company’s excellent fundamentals and prospects, I think RH is primed to do very well, assuming the market doesn’t implode. At the moment, I’m going to keep the stock on my watch list, but if you’re game, I think buying a small position (maybe half to two-thirds of what you’d normally buy, dollar-wise) here with a stop near 96 should work very well.