Legendary investor Warren Buffett announced late last week that his firm Berkshire Hathaway (Ticker Symbol: (BRK.B) owns $1.2 million shares of furniture retailer RH (formerly known as Restoration Hardware) (Ticker Symbol: RH) The move makes Berkshire Hathaway the fourth-largest shareholder in the company. The Corte Madera, Calif.-based company changed its name to RH two years ago as an attempt to rebrand itself as a “lifestyle” company and a high-end luxury brand. The move has been very beneficial to the company, as they have had a string of solid earnings reports over the recent quarters.
RH reported mixed earnings last quarter. The company reported an earnings per share beat of $3.20 per share vs. Wall Street analysts’ expectations of $2.70 per share. Additionally, RH reported a slight revenue beat of $707 million vs. Wall Street analysts’ expectations of $698 million. RH also gave an updated forecast on its quarterly guidance and is now looking at its earnings per share to be in a range between $2.08 and $2.18 which is much higher than the $1.82 per share that Wall Street analysts’ were looking for.
The above image is RH’s stock over the past two years. The company had a weaker start to 2018 but a positive earnings and guidance release sent the stock gapping higher in the first quarter. The stock proceeded to rally, led by another solid earnings report in the second quarter of 2018 that sent the stock gapping higher again. Over the course of the next three months, the stock put in a double top reversal pattern. This pattern occurs when the price of an asset reaches a high price, has a small sell-off, then retests that high failing to break above it.
Some traders use what’s called a “measured move”, to try and project where the stock might go in the future based on breakouts from technical formations. In RH’s case, one would take the high prices from the top of the pattern (roughly $163.00) and the price of the neckline from the pattern (roughly $130.00) then subtract them to get the difference ($33.00). The difference is then projected from the neckline in the direction of the breakout to project the price of the measured move. Neckline – Difference = Measured Move. In RH’s case, the projected price target from the double top pattern was roughly $97.00, which it achieved in the second quarter of 2019. The stock continued to trade lower until a positive earnings gap in the second quarter of 2019 gave it some life and the stock proceeded to rally over 100% finding price resistance around the $192.00 Currently, the stock is trading above its major moving averages and is making new highs for the year.
(Chart above courtesy of www.tipranks.com)
Based on a survey of 13 analysts offering 12-month price targets, the average price target for RH’s stock is $185.83. According to that number, the stock is priced at a premium relative to Wall Street’s analysts and could be considered very overvalued around current levels near $188.47.
Investors in RH should look to their next earnings release on December 4th for fresh news within the company.