RH: S/T pullback, Mid to Long Term price appreciation
RH stock technical’s are pointing to near term weakness, The MACD is trending lower with the 12/26 crossing below the 9 day, the slow and fast stochastics are confirming that the stock has peaked and is probably headed lower. Heavy recent insider selling of 17.6 million shares combined with a massive secondary tomorrow of 12 million shares representing 50% of the float adds insider reaffirmation of declining technicals. Additionally RH has a very high 5 year PEG ratio of 1.82, anything approaching 2 signal’s excessive valuation. The company also has a very high 111% short percentage of float, 10% is considered by many to be the threshold for a potential “ battleground stock”
Medium to long term the growth prospects for the company and stock are favorable. Near term risk adjusted return suggests an entry point closer to $ 65-67.
RH Update- Stock continues price discovery process, precipitated by last weeks oversized and poorly received insider secondary. As predicted stock attained near term stability in the $ 65-$ 67 range. I executed a buy today for half of my outstanding orders just above the mid point of that range. The stock is still digesting 8 million newly tradeable shares, with the obvious questions of when and if the insider seller will seek to dispose of the remaining 4 million shares that the secondary could not absorb. RH could bottom @ $ 63- $65 before the next positive earnings report or market moving catalyst, as others have opined on this posting chain. The question about the RH secondary being a repeat of the value destroying KORS secondary remains unresolved.
RH offering cut by 1/3 due to insufficient demand; stock price also scaled back by nearly 8%. Please consider that sellers will likely pursue another secondary in the near future to sell the 4 million shares that the market could not absorb today. Price discovery at the new and significantly larger tradeable float has just begun. The next several days will be telling. Deteriorating technicals, heavy insider selling, a poorly received secondary, and the prospects of another secondary in the wings suggest caution. In the near term the stock is more likely to decline to $ 65-67 or lower, than appreciate. Over the mid to longer term, assuming continued growth in the underlying business, the stock will resume it's upward trajectory.
Secondary was indeed broken. Stock broke below $ 70 SPO price at the opening, and has traded $ 69.13- $ 69.88 on heavy volume. The overhang of another follow on of 4 million shares and the lack of visible positive catalysts for six weeks until the next quarterly report, suggests that the stock will seek new price, and probably lower, support levels through next week. A Kors like protracted weakness in the stock remains possible. Both resulted from flooding the market multiple times with insider shares, with the prospects of more to come.
The large late February insider secondary in KORS is an instructive example. High growth/PEG story stock floods market with second secondary, after previous insider selling and big short positions. Result stock drops from mid $60's to low $ 50's and does not fully recover until late May. The RH secondary could be a replay of KORS.