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Beware Restoration Hardware’s Big Bump

A few factors could slow down this rocketing recent IPO


Ahead of last week’s earnings report for Restoration Hardware (RH), I was bullish on the company. As I noted, the earnings expectations were reasonable, and I suspected the company would continue to get a nice boost from the pricing power of its luxury brand.

Plus, the rebound in the real estate market is another tailwind.

5 Great Stocks for the Housing Recovery
5 Great Stocks for the Housing Recovery

And RH did not disappoint. In the quarter, revenues shot up by 38% to $301.3 million and comparable store sales spiked by a staggering 41%, up from 26% in the same period a year ago. Adjusted net income also rose from a loss of $1.3 million — or 6 cents a share — to a profit of $2.3 million — or 4 cents per share.

The Street was only looking for revenues of $298.9 million and earnings of 4 cents a share.

Going forward, the momentum will likely to continue. RH’s full-year forecast is for revenues of $1.47 billion to $1.51 billion and earnings of $1.41 to $1.47 per share. That was higher than its previous forecast, but a mixed bag compared to analysts’ consensus for revenues of $1.48 billion and earnings of $1.40 per share.

No wonder the stock has gained nearly 30% over the last five days and has more than doubled year-to-date.

Still, investors should now be cautious. See, RH is a recent IPO. It came public in November at $24 a share. Since then, the stock price has run up to $69.11.

Of course, IPOs can be highly sensitive buying and selling, as there is usually a small float. In the case of RH, the company issued 5.2 million shares in its IPO and then went on to sell 8.6 million shares in a secondary offering in May. Now, the total outstanding share count is about 38.1 million.

It also looks like there was a short squeeze. Short interest was over 1.53 million shares at the end of May, but the average trading volume was only 332,000. That means it was probably tough for short sellers to close out their positions.

To top it off, the lock-up expired a couple months ago. This means that insiders are now allowed to sell their positions. In light of the big run-up in the stock price, there will be lots of temptation to unload shares. In fact, RH is in the red nearly 3% today already.

This is especially likely since RH’s valuation is at nose-bleed levels. The stock is currently trading for 37 times predicted 2015 earnings. Williams-Sonoma (WSM) and Pier 1 Imports (PIR), on the other hand, are only going for 18 and 16 times forward earnings, respectively.

So while RH is certainly a great company — and should continue to grow — it’s probably best to avoid the stock for now.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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