It's no secret. Tech is the winning sector this year. Not only have tech stocks been big drivers behind the S&P 500's 12.5% gain this year, but the tech-heavy Nasdaq Composite has also obliterated the S&P 500, delivering a 28% year-to-date return. With such a big run-up in the rearview mirror, many investors are probably wondering where they can look to find good deals. After all, many of the best opportunities in tech from the beginning of the year may be borderline overbought at this point.
Fortunately, there are still a lot of good investment opportunities for investors willing to look beyond tech. One of those opportunities is in the boring industry of furniture. RH (RH 0.98%), which has spent the past decade successfully evolving into a luxury brand, currently trades at an attractive valuation thanks to negative market sentiment toward the housing market. Investors who go against the grain and buy shares today may be rewarded handsomely over the next five to 10 years.
NYSE: RH
Key Data Points
A cheap valuation
Trading at 19 times earnings, RH's valuation is far more reasonable than many tech companies. Some growth tech stocks, for instance, aren't even profitable yet have market capitalizations in the tens of billions of dollars. Snowflake and CrowdStrike, for example, have market caps of about $59 billion and $36 billion, respectively. Yet both companies are still reporting significant annual losses. Snowflake lost $856 million over the trailing 12 months and CrowdStrike's loss for the period came in at $151 million. Meanwhile, RH generated a trailing-12-month net profit of about $370 million yet has a market capitalization of just under $6 billion.
Of course, there are some valid concerns that have pushed down RH stock's valuation. But the stock's fall from a high of above $700 to about $270 today has arguably gone too far. Sure, RH's sales seem to be in freefall at the moment, as the luxury housing market faces incredibly tough year-ago comparisons. The furniture company's fiscal first-quarter revenue of $739 million was down 23% year over year. Even more, management warned investors in the company's fiscal first-quarter shareholder letter that it expects the luxury housing market "to remain challenging throughout fiscal 2023 and into next year."
But the stock's drawdown has arguably already priced in these challenges. Further, investors should remember that a recovery will likely follow a slowdown in the luxury housing market; and RH is well-positioned to benefit from a recovery. Indeed, the company even recently expanded to the European market, opening a new store in England on June 9. The sprawling store and property is a restored 400-year-old landmark estate that the company says represents its "greatest work to date..." So it can participate in not only a North American recovery but a European one, too.
Finally, RH is set up well having recently expanded its business to new areas that could also benefit from an economic recovery. While still small as a percentage of its total sales, the company has rolled out some luxury hospitality businesses like restaurants and hotels.
1 big bullish sign
Management at the furniture company is certainly betting big on an eventual recovery. During fiscal 2022, RH spent approximately $1 billion repurchasing its shares at an average price of $269. That's a huge sum for a company with a market capitalization of close to $6 billion. RH wouldn't buy back its stock this aggressively if it didn't believe shares were undervalued today.
While there are risks to buying RH stock, including a potential worsening of the luxury housing market or a slower-than-expected recovery, the stock's cheap valuation seems to do a pretty good job of baking these challenges in. Overall, investors who buy RH stock today have a good chance of sitting on some impressive gains five to 10 years from now.
