When Warren Buffett buys a stock, investors pay attention. Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), the holding company that Buffett runs, reports a quarterly filing called a 13F with the Securities and Exchange Commission detailing its equity holdings, and Berkshire followers closely monitor it when it comes out.
RH: The future of upscale furniture
RH has grown from its fairly humble beginnings as Restoration Hardware to become a $3.8 billion company with 81 stores and growing. Berkshire first picked up shares in 2019; since then, RH's stock price has increased nearly 60%.
There are a few reasons why Buffett would like this stock, although it may have been chosen by one of his portfolio managers. It has a large moat, which means that it's differentiated enough that it would be difficult for another company to infringe on its terrain. Visionary CEO Gary Friedman is creating a luxury brand, reaching into new territory such as well-designed jets, yachts, and restaurants. It has a distinct image and the pricing to match, and it targets a well-heeled population that's looking for high-end products and services and has the money to afford it.
RH has bounced back from earlier pandemic declines, and sales increased 32% year over year in 2021. It's also highly profitable, and net income has skyrocketed recently as the company has moved to charge high prices and expand its margins.
That increase comes in spite of the same supply chain problems most retailers are dealing with. Looking forward, RH faces a tough year-over-year comparison with 2021, and is therefore guiding for 5% to 7% year-over-year revenue growth. It's also opening new galleries, including its first foray outside the U.S. Long term, there's tons of opportunity here.
Finally, RH stock is super cheap, and has gotten cheaper as its share price declines, making now a good time to buy shares. RH stock is down 44% this year, and shares trade at a low valuation of 14 times trailing-12-month earnings. With double-digit revenue growth and triple-digit earnings growth in 2021, as well as many expansion opportunities, the stock looks undervalued.
Floor and Decor: Modest but growing
Berkshire first took a position in Floor and Decor last quarter, and has now added even more to its new holdings. Floor and Decor is a flooring and hardware superstore, featuring mega-size warehouses filled with every type of flooring and other accessories at great prices. It's similar to a Home Depot or Lowe's, but with a very specific, niche product. It operates 166 stores in 34 states and sees a market for 500 stores. It has plans for 32 new stores in 2022.
Sales have been brisk, and future potential is supported by a strong housing market. This is what it's looked like over the past five years:
Sales continued to rise in the 2022 first quarter, increasing 31% year over year. Net income decreased 6% to $71 million as the company deals with supply chain issues and rising costs, but it's still turning a nice profit, and expects 2022 earnings per share to increase from $2.65 in 2021 to $2.75 to $3.00.
Floor and Decor stock is also down 44% this year, and shares trade at 28 times trailing-12-month earnings. That's not nearly as cheap as RH, but it's still cheap for a company growing as fast as Floor and Decor, and it still looks undervalued relative to the future opportunity.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares), Home Depot, and RH. The Motley Fool recommends Lowe's and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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