What do the relentless declines in so many stocks really mean? What do we think, for example, about the endless selling in the shares of a company such as Restoration Hardware (RH)? It is stunning when you think about it and it is worth considering because, in many ways, it is the perfect stock to own in this environment.
First, it is all domestic. No strong dollar worries here. Even better, it sources in Europe, where the strong dollar is actually good for the bottom line.
Second, no one would contend that there are any issues with what it sells. It makes the finest merchandise for the home, and we know from Home Depot (HD) that the home is something on which money still is spent. Indeed, Home Depot told us that spending money on a home is viewed as an investment, and Restoration Hardware's wares certainly make your living space more investment-worthy. There's a reason why we chose to remake our bathrooms with Restoration Hardware materials. They are the best, and even as you can find cheaper, cheaper doesn't improve valuation.
Third, the expansion is proceeding apace. There is tremendous demand out there for Restoration Hardware stores and they are regarded as destinations, some would say tourist attractions.
Finally, CEO Gary Friedman has delivered on all of his promises. Everything he has set out to do he has done, and you have to appreciate these efforts.
All that said, the stock just hit a new 52-week-low and is off 29% for the year.
That's just mind-boggling. It's killed anyone who owns it.
What does it say?
I think the verdict is this: The stock didn't belong as high as it was to begin with. A company that sells expensive furniture is a company that should get about a market multiple in this environment. Ethan Allen (ETH), an older, more established furniture company, just reported a very strong number, and it sells at 15x earnings. While I know that the RH people wouldn't want to be lumped in with Ethan Allen, they do sell into the home, and in an era where all stocks are homogenized like commodities, it's a fact.
So, given that the group is trading down big and the stock is part of the group, there isn't much else to be said about it other than it's a good long-term investment even as, at this moment, no one would want to touch it.
The one thing I would point out, though? It is only worth $2 billion now even as it has a long-term goal for $4 billion to $5 billion in sales. At a certain point it's simply worth more than that.
Is this the point?
In this market I am sure it will arrive at that point and then go right through it because, alas, it is that kind of meat grinder like we haven't seen in quite a long time, taking down the highest- and lowest-quality stocks at the exact same time.
