Shares of Restoration Hardware (NYSE:RH) have been on fire. Restoration Hardware stock is up 59% so far this year and 85% over the past 12 months.
It’s got many investors sitting with the uncomfortable feeling of “FOMO” or fear of missing out. Now that it’s pulling back, some are wondering if it’s a worthwhile buy.
This stock is akin to a rollercoaster though. At one point, Restoration Hardware went from $100 in the fall of 2015 to about $25 just nine months later. If that doesn’t scare investors, I don’t know what will.
A Look at Restoration Hardware
However, a key thing happened when shares took that massive dip. Rather than shaking up the C-suite or making a big change, Restoration Hardware doubled down. Instead of CEO Gary Friedman stepping down from his role, he stepped up and bought some stock.
Specifically, Friedman slugged up more than 32,000 shares near $27.50. That was in July 2016. While the next few quarters had their ups and downs with shares climbing toward $40 before revisiting the mid-$20s, the stock had tripled a year after Friedman’s purchase.
That didn’t stop the CEO though. He gobbled up stock three more times in 2017, paying up to ~$97 in December. Who averages up when they’re near a quadruple? Someone who knows good times are still coming.
So far this stud has held steady in 2018. Shares are now trading near $136 and carry a 52-week high of $164.49. Those highs represent an almost six-fold return from Friedman’s 2016 purchase.
So investors’ golden indicator? Buy Restoration Hardware stock when Gary Friedman buys.
Valuing Restoration Hardware Stock
So what’s up with Restoration Hardware anyway? Shares trade at about 20 times this year’s earnings, but some investors will find that too expensive for their tastes. Others may like it for its growth and disregard the valuation.
Analysts only expect sales growth of 4.6% this year and 8% next year. The acceleration in growth from 2018 to 2019 is attractive, but its earnings growth shouldn’t be ignore.
Estimates call for 119% growth this year and 13% next year. However, given that earnings estimates for next year have increased more than 13% over the past 90 days, they still may be conservative.
Margins are up significantly, with gross margins improving by several hundred basis points year over year. Plus, the tax overhaul should help Restoration Hardware’s results. Here’s the thing though, it won’t just help Restoration Hardware’s bottom-line results with its business operations. More importantly, it will help its customers.
Have you ever shopped at a Restoration Hardware? It’s exciting and depressing all at once given the price tags. But as the wealthy get wealthier, they’ll need to refurnish their current homes or furnish their new ones. Restoration will be there to help and investors will reap the reward.
For perspective, just look at how companies like Ferrari (NYSE:RACE) or Toll Brothers (NYSE:TOL) are doing. They will suffer when the economy slows down, but for now, the good times just keep on rolling.
Trading Restoration Hardware Stock
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Because Restoration Hardware doesn’t have the lowest valuation, a pullback wouldn’t be the worst thing in the world. Specifically, I’d love for a shot in the $100 to $110 area. For starters, this was a big breakout level (blue line) for Restoration Hardware back in June. So a retest and hold would actually be pretty bullish.
There’s also strong, multi-year trend-line support that could come into play. However, if RH stock doesn’t pull back soon, this level may play a role in the $120s or higher in the not-too-distant future. Finally though, both the 100-day and 200-day moving averages are in this area and should act as support as well.
That’s the longer-term setup for more conservative Restoration Hardware bulls. The more aggressive and short-term trader has a sort of falling wedge setup here (purple lines).
After pulling back from $160, Restoration Hardware stock has been cascading lower in a very orderly fashion. So long as it stays above this wedge, bulls can play it from the long side. They can perhaps consider using the 50-day moving average as a stop-out point.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held no position in any of the aforementioned securities.
