Warren Buffett has become an investing icon. His prowess over the decades has made him a multi-billionaire. But even the Oracle of Omaha has made mistakes, such as his investments in airline stocks.
Still, looking at Berkshire Hathaway's stock portfolio is not a bad place to start for investment ideas. Then you can analyze which ones appear to have the best prospects. Warren Buffett has a penchant for buying value stocks, and so it's worth keeping in mind his advice that "it's far better to buy a wonderful business at a fair price than a fair business at a wonderful price."
With that in mind, let's see why one of his holdings, RH (RH 0.42%), could qualify as the rare "wonderful business selling at a wonderful price" -- meaning that it could very well make you a lot of money provided you have some patience.
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A discount
Since the start of 2022, RH's shares have lost nearly 47% -- way more than the S&P 500's 18% drop. That's in large part because the company makes luxury furniture that it sells across various channels, such as its retail stores and website.
NYSE: RH
Key Data Points
With interest rates increasing, investors fear the housing market will slow down, hurting RH's business. Consider that the 30-year mortgage rate was recently at 5.3%, quite a jump from the 3.1% at the end of 2022. The market's concerns about a potential recession have also been elevated due to the Federal Reserve's aggressive increase to interest rates to combat high inflation.
The stock's sell-off means it's trading at a lower valuation. Currently, RH's price-to-earnings ratio (P/E) is about 13 compared to the roughly 48 multiple it was trading at a year ago. Fears about short-term prospects appear to be driving the price action.
Strong long-term prospects
Yet, RH's results so far have been strong. For its fiscal fourth quarter, which ended on Jan. 29, revenue grew by 11% to $903 million and adjusted earnings rose by 14% to $164 million. The company's operating margin, a focus of management for a long time, expanded from 23.7% to 25.2%.
Despite headwinds from a potentially slower housing market and supply-chain issues, management still expects decent growth this year. It anticipates 7% to 8% revenue growth in the first quarter and 5% to 7% for the year.
While sales may slow down in the near term, the company has built a loyal customer base that supports RH's long-term growth prospects. At the end of the latest fiscal year, there were 459,000 RH members, an increase from 434,000 a year ago. Accounting for 97% of RH's core sales, they pay $175 annually and receive promotions and discounts.
RH plans to continue opening galleries in the U.S. and Europe. The latter is especially a growth area for the company. There are also new concepts, such as testing hospitality, travel, and food, that could drive traffic to its galleries and cement its reputation as a luxury goods provider.
Warren Buffett has stated that his favorite holding period is forever. Certainly, a long time horizon allows you to ride out the short-term dips in a stock's price. With that in mind, RH's stock, selling about half the P/E it was at the start of the year, looks very inexpensive. And buying shares at a discount in a solid business is a strategy worth emulating.
