Wed Apr 02 2014
Live Index (1451 articles)

Double-Digit Rally Appears to Be in the Cards for This Growth Stock

High-end home furnishings retailer Restoration Hardware (NYSE: RH) popped up on my radar again after the stock rallied 13% Friday, following the company’s earnings report after Thursday’s close.

Fourth-quarter earnings per share (EPS) of $ 0.83 were 38% higher over the same period last year and beat estimates by a penny. On the top line, revenue increased 18% year over year to $ 471.7 million but missed estimates of $ 493.1 million.

In terms of its outlook, for the fiscal first quarter, Restoration Hardware said it sees adjusted EPS of $ 0.09 to $ 0.11 on revenue of $ 345 million to $ 350 million. Analysts were only expecting $ 0.07 on revenue of $ 349.3 million.

For the full fiscal 2014 year, the company is looking for EPS in the range of $ 2.14 to $ 2.22, compared to the $ 2.17 analyst estimate. It sees 2014 sales in the range of $ 1.82 billion to $ 1.86 billion, while analysts have it pegged at $ 1.89 billion.

Investors and analysts seemed to be able to look past the revenue miss, which was largely blamed on poor weather conditions, and focus on revenue growth. And after Friday’s double-digit rally, this growth story is also back in focus for active investors and traders such as myself.

RH is a relatively new issue, but since its initial public offering in November 2012, the stock has delivered impressive gains.

While there is often a honeymoon phase for investors after a company’s IPO that can last anywhere from a few hours to a few months, ultimately the stock settles into an intermediate trend, either up or down. This intermediate trend typically lasts for 6-12 months and is detected by its severity. In the case of social media giant Facebook (NASDAQ: FB), for example, the honeymoon phase lasted only a few hours before the stock settled into a defined downtrend.

Once a stock has traded in the public markets for 12-18 months and has both the honeymoon and post-IPO trending phase behind it, analysts and investors get a better handle on the company as it has had a few quarters to prove itself (or not). From a price action point of view, the stock has also likely developed some sort of a rhythm that then brings in the more active types. This is the time when I begin to really focus on a stock, and currently, RH has reached this sweet spot.

After a few months of sideways action following its November 2012 IPO, RH began to rally sharply in the spring of 2013, and by July, had gained 140%.

From there, the stock settled into a sideways consolidation pattern, and remains in it to this day. The pattern has the shape of a big bull flag, which could resolve to the upside on a sustainable break above $ 75.

In January and early February, RH again tested the lower end of this multi-month sideways range, which at the time also coincided with a 50% retracement of the entire rally from April to July 2013.

On the daily chart below, we see the stock began to slowly move higher from there, and by mid-February, had overcome its 50-day moving average, which it then successfully retested for support last week.

Friday’s big rally took RH back above its 200-day simple moving average for the first time since December, as well as above lateral resistance around the $ 69 mark that has been in place since December.

From here, although RH remains in the multi-month sideways range, it does look to have enough momentum to ultimately push past resistance and to new all-time highs in coming weeks and months.

Recommended Trade Setup:

– Buy RH at $ 72 or higher
– Set stop-loss at $ 67
– Set initial price target at $ 84 for a potential 14%-17% gain in 4-10 weeks

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