It’s been a brutal year for RH, better known to most as Restoration Hardware, a stock Buffett holds in his Berkshire Hathaway portfolio. The bear market has wiped out more than half of its value this year. At last count, it was down 53%.
Even the best stocks get taken out to the woodshed and chopped in a bear market. The challenge is knowing which ones will bounce back. A quick look at the top FAANG stocks reveals carnage this year too… and they are the best of the best:
- Amazon: down 31.1%
- Meta: down 57.8%
- Alphabet: down 30.9%
- Netflix: down 60.3%
- Apple: down 16.0%
When the leaders get eviscerated, it’s often not too long before there’s “blood on the streets” which signals the optimal time to buy. But when panic selling takes hold, it’s easy to get caught up in the fearful sentiment. That’s why now is the time to evaluate candidates to buy, and figure out what companies could be set for epic comebacks. RH is among those candidates. Here’s why:
Buffett Short-term Vs Long-term Track Record
The Oracle of Omaha didn’t become the most successful investor of all time by making many mis-steps. He has certainly stepped on a few landmines over the years. IBM is an example of that. And his performance this year is lackluster.
Over 4 out of every 5 stocks Berkshire holds is in the red this year. But his long-term track record is exemplary. In the period from Berkshire’s inception to the end of 2021, shareholder returns have eclipsed 3.6 million percent – that’s not a typo!
A key to this extraordinary track record is picking great companies and management teams, and sticking with them through the various trials and tribulations the market throws at them. So, what is it that Buffett see in RH that is compelling him to stick with it, and what could ignite the share price when this period of doom and gloom passes?
The Misunderstanding of RH
It’s easy to dismiss RH. It’s just a luxury home furnishing store after all. Or is it?
RH is, in fact, focused on the long-term and its brand strategy. As the recession rolls on, RH management could boost demand to offset sluggish sales by cutting prices. But that wouldn’t align with the upscale brand that has been carefully crafted since 2020 when CEO Gary Friedman wrote:
“Hermès, Chanel, Louis Vuitton, Gucci, Cartier, Tiffany, and the rest of the finest luxury brands in the world were all born on the top of the luxury mountain. Never has a brand started near the base and made the climb to the peak. We believe RH can be the first to make the climb,” he wrote in a shareholders letter.
The vision is to expand from simply selling furnishings to creating an ecosystem that becomes a lifestyle:
“Our vision is to move the brand beyond curating and selling product to conceptualizing and selling spaces by building an ecosystem of products, places, services and spaces that elevate and establish the RH brand as a global thought leader, taste, and placemaker.”
The plan is clear:
- RH Galleries will feature experiences like dining and hospitality in order to bring more prospective buyers into stores.
- RH Guesthouses feature resorts and the RH3 yacht that can be chartered in the Mediterranean or even the Caribbean.
- RH Residences will feature fully furnished condos and homes.
Collectively, these are intended to build RH as an authority when it comes to interior design and hospitality.
The goal is to significantly boost brand value to reach $20 billion, a 3-4x increase from current levels.
Will RH Be Successful?
For RH to achieve its vision, it will need the bullish tailwinds of easy money to support it. But that’s not all. It’s one thing inviting customers into stores and delighting them with exquisite food as it does in its flagship Manhattan store. It’s quite another to price a sofa at $20,000 and expect clientele to be price insensitive.
Nevertheless, there comes a time when share price is so compelling relative to fair value that even if execution isn’t perfect and there are mis-steps, the value proposition to investors is overwhelming. And if we’re not there yet, we’re not far away.
By our calculations, RH has enormous upside potential. Fair value sits at $398.19 per share, representing as much as 61.3% upside. If it’s not worth feasting on the stock yet, a nibble is certainly appetizing.