I Think This Deal Will Work

 | Jul 10, 2013 | 9:40 AM EDT
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What if there's this perfect security for the moment? What if this stock is part of the red-hot retail component, especially with the Merrill Lynch Retail HOLDRS ETF (RTH) breaking out? What if it's connected with the highest of high ends of retailing, and management just raised guidance, and the world is clamoring for its shares?

What do you do when the company insiders answer and file for a 12-million-share secondary offering? That's what has just happened with Restoration Hardware (RH), and I think it represents the great test case for so much of this remarkable post-bond-selloff rally.

Why is it so important? Let's rip them down:

1.  Housing has been a laggard since the big jump in interest rates. Traders have decided to shun the group for pretty much anything, even coal, that hasn't moved yet.

2.  Restoration Hardware carries the most expensive retail product lines there are. We've had some mixed reports on the highest-end of late, so perhaps that group won't deliver on this one.

3.  The stock has been very heavily shorted, as people simply don't believe the hype, and they don't think the same-store sales can stay as strong as they have been. It is daunting to maintain 40%-plus comps, and the non-believers aren't going to cover on this one. They are going to slam it down hard and try to get something going.

4. The management team is different -- more ethereal and artistic than most -- this is throwing people off. Don't be thrown off. These are our best and most inventive merchants since Mickey Drexler took J. Crew private.

I have been recommending the company for ages, and I think it is a remarkable story. Sure, if rates spike to 3% on the 10-year U.S. Treasury, and do it quickly, Restoration Hardware is going to get hurt -- and no tree grows through the sky.

That said, I think this deal will pass the test. I think it will work, just like the last one did. It is the darling of the moment, and darlings don't die when numbers are going higher. They die when numbers are being cut. This one's strictly the former.

I think the deal will work, and that it is worth putting in for. 

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