Options Trading Idea: Restoration Hardware Into Earnings (RH)

While many investors only think of Home Depot (HD) and Lowe’s (LOW) as the home improvement stocks/companies, Restoration Hardware (RH) is a smaller, higher growth player primarily in the luxury market. CEO Gary Friedman said they plan on launching new businesses later this year (and will reveal details in the coming quarters). The company currently sells everything from beds and windows to contemporary art and baby slippers/booties.

RH trades at a P/E ratio of 30.23x (Jan ’16 estimates), price to sales ratio of 1.96x, and a price to book ratio of 5.21x. Trading at 30x may seem rich, but earnings are projected to grow 25-30% annually for the next couple of years (PEG ratio around 1x) and high teens sales growth is also helping justify the multiple. Wall Street analysts remain overall positive on the company with an average analyst price target of $101.60. On May 2nd, Nomura reiterated their buy rating and a $110 price target.

Q1 earnings are due out on June 11th (and shares have moved higher after earnings on 4 out of the last 5 reports). The options market is pricing in a $6-$7 move (up or down) through the end of next week. As always, being involved in stocks over earnings can be a volatile proposition.

Unusual Options Trading Activity

On June 5th, the June $95/$100 bull call spread was put on 5,000 times for a $1.30 debit. Call activity was 7x the average daily volume. He/she is making a bullish bet on the stock rising 8-9% by close on June 19th. It is worth noting that there was bullish option order flow prior to the previous earnings report in March (went from $93 to $102 in the two days after results). But, as always, investors will need to buckle up and focus on their time frames and risk comfort.

Restoration Hardware Stock (RH) Technical Analysis

restoration hardware rh stock chart higher price targets june 2015

Back in April, RH not only successfully tested the 40-week simple moving average on the 2 year chart above (similar to the 200-day simple moving average), but the long-term uptrend line as well. The stock now has the ability to rise into the $100+ resistance level where it struggled in late 2014 and March of this year. Stop losses on long stock positions can be placed under the April lows of $85.82.

Options Trading Idea – Restoration Hardware (RH)

For those that own or trade the stock via options, one could consider buying the (RH) June $95/$100 bull call spread for a $1.70 debit or better.  (This would consist of buying the June $95 call and selling the June $100 call, all in one trade). Note that I do not have a current position in RH, but I am considering taking one via trading options.

Stop loss- None

1st upside target- $3.40

2nd upside target- $4.95

 

Twitter:  @MitchellKWarren

No position in any of the securities mentioned at the time of publication.  Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

 

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