Restoration Hardware: Look to Start Building a Position in RH Stock

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Last week, shares of upscale home furnishing company Restoration Hardware Holdings, Inc. (RH) continued their rally off the mid-October lows and by so doing accomplished a technically significant breakout move.

beat the bell stock investing adviceRH stock continues to act well in all time frames through a technical lens, and now offers active investors very clearly defined risk to play the stock from the long side.

On the news front, keep in mind that Restoration Hardware is scheduled to report its next batch of earnings on Dec. 12, which is just a few weeks away from today.

Over the past month or so, analysts have been busy initiating coverage on the stock or reiterating positive comments. Deutsche Bank and Raymond James initiated coverage on the stock with respective “buy” and “outperform” ratings, with both eying a $90 price target for RH stock — about 10% above current levels.

From a valuation perspective — and considering that Restoration Hardware is to be considered a growth stock — its price/earnings-to-growth ratio of near 1.3 is low compared to many of its peers in the home furnishing business.

RH Stock Charts

On the multiyear weekly chart, RH stock has shown a well-defined pattern of consolidation phases followed by breakouts. In the two years that Restoration Hardware has been publicly traded, RH stock has offered active traders and investors with two major breakout moves and plenty of “buy-the-dip” opportunities.

After an initial honeymoon phase, RH stock finally broke higher in May 2013 and more than 90% rally in about two months. The stock then settled into a prolonged sideways move before breaking out again in June of this year. RH then topped in July and has been forming a constructive pattern that could be looked at as a bull flag.

The mid-October lows coincided with the previous resistance/highs from July 2013 until June 2014, as well as the 200-day simple moving average.

restoration hardware rh stock
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On the daily chart, note that at the recent broader market lows on Oct. 15, RH stock marked its lows with a bullish outside/bullish reversal candle as it bounced right off the rising 200-day simple moving average (red line). Then last week, RH made a further move to the upside as it pierced back above its 50-day SMA (yellow line), which also pushed the stock back above diagonal resistance dating back to the early July top.

Over the past few days, RH stock has been consolidating above these previous resistance areas and looks to push into the high $80s.

RH stock daily
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Active traders could look to hop on board once the stock clears the $83.70 area (i.e., last week’s highs for a move into the high $80s), while more tactical investors may consider initiating a long position at current levels, using the October lows as a stop and a price target in the mid-$90s.

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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.

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