KEY POINTS

  • Long-term tailwinds in housing spending should boost RH stock.
  • To dominate the online home-goods business, Wayfair is laying the groundwork.

Investors who shop for equities as they would for bargains are in the best position to succeed long-term. When companies are on sale, Warren Buffett buys shares of outstanding businesses. Companies that have been through adversity often bounce back.

If you have cash set aside for investing that will last at least five years, Restoration Hardware (NYSE:RH) and Wayfair (NASDAQ:W) are two excellent businesses with solid prospects. So let’s learn a little more about these two dirt-cheap equities that could soar.

RH

Following billionaire investors when there is market volatility may be beneficial at times. What better place to pick from than Buffett’s Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), which has a stake in the most prominent luxury home furnishings store RH.

Suburban migration

According to recent data, average annual expenditures on house furnishings have been steadily rising over the last several years.  Furthermore, they should continue to increase in the future. The migration of customers to the suburbs is a half-century-old trend, benefiting RH. Moeover, as a result of its specialty in high-end furniture and premium pricing, the company has seen record earnings.

Growth in multiple areas

Over the last five years, revenue has risen by a cumulative 64%, to $3.7 billion in the third quarter of fiscal 2021.  Moreover, the gross profit has grown at an even  faster rate of 147%. RH incurs significant up-front expenditures in the form of occupancy costs for its buildings and distribution centers. As demand grows, much of the additional income goes straight to the bottom line.

The company’s free cash flow, or the amount of money generated through operations, has more than tripled in the last five years. In a challenging retail environment, with revenue and adjusted earnings per share up 19% and 13%, respectively, the firm is doing exceptionally well in the fiscal third quarter.

Outlook positive

The luxury home furnishings market is estimated to increase to $30 billion by 2023. Meanwhile, RH is working to make its business even more profitable. Management’s growth strategy includes opening new galleries in major cities worldwide while expanding to new sales categories and services.

The aim is not just to be a top curator and vendor of luxury furniture but also to get involved in selling an ecosystem of items and services that may help clients conceive their entire home. That could lead to increased repeat spending with RH as a result.

Cheaper than its worth

The economy’s concerns in the near term, particularly inventory and cost inflation, have caused the stock price to drop 36% thus far this year. However, it is now significantly cheaper, with a P/E ratio of 16. That is a fair value compared to the S&P 500 (^GSPC) average P/E of 24. Once economic uncertainty fades away, RH’s more robust growth prospects and inexpensive valuation may cause the stock price to rise dramatically.

Wayfair

The largest online vendor of home products, Wayfair, has benefited from similar trends in home furnishings. Its unique focus on the digital side has benefited from the double boost of growth in household spending and e-commerce—n with the latter a particularly powerful tailwind for investors.

Room to grow

According to eMarketer, worldwide retail e-commerce sales will reach $7.4 trillion by 2025, up from $4.2 trillion in 2020. But even at that enormous amount, in 3 years, e-commerce sales would account for just a fraction of overall retail sales globally. So that gives Wayfair a lot of room to grow.

In 2021, the firm experienced some growth challenges.  However, these challenges  were primarily due to the significant year-over-year comparisons with the exceptional demand in 2020. Wayfair announced $13.7 billion in overall revenue last year.  That revenue is slightly lower than previous years but up 50% over record 2019 sales.

Repeat Customers

Wayfair’s internet sales are increasing quickly, and the company is seeing increases in its customer base. As a result, repeat purchases now make up three-quarters of yearly sales, compared to just 57% of total sales in 2016.

Meager price

On a price-to-sales basis, the stock has rarely dropped below 1. When Wayfair falls this low, it usually doesn’t stay this cheap for long.

Investors who keep their attention on the business and buy shares at these prices might see a substantial profit in the next five years.

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