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Is the Election a Bigger Risk Than COVID-19 for RH Stock?

By Neil Patel - Oct 17, 2020 at 10:50AM

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The global pandemic and uncertainty in Washington are at the top of investors' minds.

In what has been a chaotic year, no issues seemed to garner more of our attention than the coronavirus pandemic and the upcoming election. These two important events have huge implications for stock market investors.

RH ( RH -4.21% ), the luxury home furnishings retailer, has been and will continue to be affected in its own distinct way, not least because of who its target customer is. In its most recent annual report, the company mentions how its business is influenced by conditions in financial markets. RH primarily serves affluent consumers, and these are the same people who own stocks and real estate.

Changes in asset prices can alter the confidence of high-end furniture shoppers. Keep this in mind as we assess whether or not what happens on Nov. 3 is more of a risk for RH stock than COVID-19.

Pen drawing a line depicting growth in 2020.

Image source: Getty Images.

Health and economic crisis

RH stock plunged 62% between the beginning of this year and March 20. Uncertainty about the coronavirus was sky high, and Chairman and CEO Gary Friedman had just announced the temporary closure of all RH locations. In early April, the company implemented furloughs and expense reductions.

However, what seemed like a dreadful position for the furniture retailer was nothing more than a blip on the radar -- a minor setback for a major comeback. Since then, the stock has gained 368%, boosting RH's market capitalization to $7.5 billion. Stay-at-home orders in response to the pandemic paved the way for a record quarter for RH. In the second quarter of fiscal 2020, which ended Aug. 1, RH reported an adjusted operating margin of 21.8% and net income of $98.4 million.

Was this just a momentary boost? Friedman doesn't think so: "We are benefiting from the COVID-driven shift of spending in favor of the home, but this has coincided with a systemic shift and leapfrog of our operating model to a level unseen before in our industry," he said in the Q2 shareholder letter.

I don't think COVID-19 is a risk for RH. Instead, it resulted in a breakout quarter for the company and an all-time high for the stock. Furthermore, existing trouble in the retail sector, coupled with the fragmented nature of the luxury home furnishings market, should strengthen RH's competitive positioning going forward.

Political uncertainty

What about the upcoming election? This is where RH's customer base comes into focus. I previously mentioned how management believes that fluctuations in financial markets impact sales.

Markets are typically volatile in the months preceding general elections. This has more to do with the looming cloud of uncertainty than with who actually wins the White House, which impacts the stock market less than what the Federal Reserve does. Low interest rates and unprecedented amounts of monetary stimulus will do more to boost asset prices than anything the President could do. Although positive arguments can be made for both candidates in regards to the economy and stock market, investors simply need confidence in what Washington will look like for the next four years.

Rising stock prices and a robust housing market have increased RH customers' wealth this year. According to data from Redfin, a real estate brokerage, the median sales price for homes in the U.S. rose 14.4% in September: the biggest monthly gain in at least five years. Who's benefiting from this? Seemingly, RH customers, many of whom own multiple homes. A rising net worth, albeit on paper, will lift buyer confidence.

The coronavirus pandemic may have bolstered RH's business, but the unknown variable that is the election could cause some consumers to delay big-ticket purchases. Nonetheless, long-term investors shouldn't worry. Volatility can potentially present an attractive buying opportunity. The business is humming along just fine. Neither COVID-19 nor the election pose any serious risk for RH stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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