Restoration Hardware Holdings Inc (RH): Is This Momentum Stock Presenting Value?

Page 1 of 2

Restoration Hardware Holdings Inc (NYSE:RH)In my article, “Top Value Stocks for the Next Six Months,” I included Restoration Hardware Holdings Inc (NYSE:RH) as a top “value” pick. Immediately, I received several comments, explaining that I should revisit the rules of value investing, and that Restoration Hardware Holdings Inc (NYSE:RH) at 37 times next year’s earnings could not possibly be a value investment – or is it?

Value Explained!

There is a belief among retail investors that in order for a stock to be considered a value investment it must meet generalized criteria, those that you could identify on a stock screener. One of the most popular metrics among retail investors is the P/E ratio, which compares a company’s market capitalization to its net income. While I have heard many “rules” regarding a P/E ratio, most retail value investors would like to think that a stock trading over 20 times earnings could not possibly present value – or could it?

In my book “Taking Charge With Value Investing (McGraw-Hill, 2013)” I worked very hard to attack many of these psychological notions of value. Based on my research, most of these myths of value are determined by investors who believe that there is an actual formula for value investing that they can adhere to and be successful.

In my book, I explain that generalizing a P/E ratio, price/sales ratio, or a price/book ratio are all worthless in a widespread setting. Instead, I suggest breaking away from these notions, and relying more on a stock’s comparison to its peers as an indication of value. This strategy is what leads me to my conclusion that regardless of stock performance, a stock can still present value, much like Restoration Hardware.

Compare To Find Value

In an attempt to determine whether a stock is presenting value, we need to compare it to its peers, not the overall market. Thus, let’s see how Restoration Hardware Holdings Inc (NYSE:RH) compares to its larger peers.

Restoration Hardware The Home Depot, Inc. (NYSE:HD) Lowe’s Companies, Inc. (NYSE:LOW)
Market Cap (billions) $2.7 $117.3 $47.3
Price/Sales 2.09 1.55 0.93
Revenue Growth (last quarter) 38.3% 7.4% (0.5%)
Forward P/E Ratio 37 18.85 17.43
Operating Margin 3.87% 10.89% 7.29%

The first thing to notice is that Restoration Hardware Holdings Inc (NYSE:RH) is at a different stage in its business versus The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW). Restoration Hardware is a growth company, while Home Depot and Lowe’s are more cyclical in nature. This alone changes the typical valuing metrics, as growth companies are awarded larger valuations versus those that replicate GDP in growth.

Nonetheless, The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW) set the standard for valuing such companies in the space, and both trade with metrics that are greater than the S&P 500. With that said, Lowe’s and Home Depot have $125 billion in combined revenue; Restoration Hardware Holdings Inc (NYSE:RH) has revenue of just $1.3 billion; this leaves a significant amount of room to grow for Restoration Hardware.

The next metric to look at is price/sales, and its relevance to growth. First, The Home Depot, Inc. (NYSE:HD) is more expensive than Lowe’s Companies, Inc. (NYSE:LOW). However, Home Depot is also producing top-line growth, while Lowe’s is not. Therefore, The Home Depot, Inc. (NYSE:HD) trades at a premium to Lowe’s.

Page 1 of 2

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!