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 0.64%), 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.
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.
