Growth stocks are down and out these days. For example, Cathie Wood's Ark Innovation ETF is down 63% this year, far underperforming the S&P 500's 15% loss. Investors who have been enjoying years of a robust bull market are now seeing the benefits of owning value stocks.
For most people, a diversified portfolio with a mix of growth and value stocks, in addition to other ingredients, is the smartest way to maximize long-term returns. That way, you get the healthy gains of growth stocks over time, balanced with security to shield your portfolio under rougher circumstances, such as the current market.
Investors are hoping for a market rebound in 2023, and the market has been making some headway in these last few weeks of the year. That means now is an excellent time to find great growth stocks to fuel your portfolio when growth stocks come back. Luxury furniture company RH (RH 1.32%) could be a surprise growth pick for 2023.
A simple, but powerful, retail model
RH sells luxury furniture to an upscale clientele, with matching prices. In general, that's a winning model. Its affluent customers are less affected by inflation and economic pressure and enjoy more spending money. That drives growth in any season and provides some cushion at times like these.
It also means RH typically demonstrates high margins, fueled by high full-priced sales, and robust profitability.
However, even RH is feeling the pinch of inflation. Sales growth has been slowing down for a few months and turned into a decline in the 2022 third quarter. Sales fell 14% year over year, and adjusted net income fell from $207 million to $147 million. Those were both above expectations.
That's also facing the backdrop of a strong 2021 third quarter, with a 19% sales increase.
No compromises for this brand
Management wasn't fussed by the results. CEO Gary Friedman already warned shareholders that RH would not dilute its brand through promotions, which could generate higher short-term sales but devalue the premium branding.
RH has decided to take the short-term repercussions of losing some of its lower-income customers with the goal of positioning itself for success later on.
Considering that RH's lower-priced peers aren't exactly demonstrating strong growth now, it doesn't look like a huge sacrifice. RH is led by a visionary leader with a long-term strategic plan, and that's at least one point that deserves a vote of confidence.
A differentiated approach to growth
RH aims to be a different kind of company, and it sees itself as a luxury brand more than a furniture retailer.
To further those ambitions, it has expanded into various experiences branded with the RH imprint. Each of its stores, which it calls galleries, features museum-like design. It operates several high-end restaurants and has launched RH-branded yachts, jets, and a guesthouse.
It has 67 galleries, plus outlet shops and 14 Waterworks stores. But it has several more in the works set to open in curated locations. It's also in the process of opening its first location out of the U.S. in a U.K.-based "historic estate" featuring three restaurants. It envisions having galleries in all major global cities.
What to expect next year
Friedman did not sugarcoat the situation. He said RH would continue to bear the burden of its choices through several quarters as it both laps earlier growth and operates through a collapsing luxury housing market.
However, it's by no means slowing down.
It launched several new collections in 2022, and it's expecting to launch it's largest-ever merchandise collection in 2023, as well as redesign every one of its galleries. It's also opening new galleries and acquiring several bespoke furniture manufacturers. Finally, it's hiring renowned editor Margaret Russell, previously of Architectural Digest, to roll out a content platform called RH Media.
Why RH stock could soar
RH stock is trading at 9 times trailing 12-month earnings, and with its growth plans, that looks like quite the deal. If interest rates slow down and the housing market picks up, RH's performance could highly exceed expectations. Although RH stock fell after the third-quarter earnings release, it quickly rebounded on investor confidence.
If RH does bounce back in 2023, it would still be a surprise. But long-term, RH stock is well positioned to skyrocket. So even if it lags, shareholders with a long-term time frame should be well rewarded.
