Restoration Hardware (RH) Takes a Tumble
1:35pm (EST)
Our Weekly Wrap profiles possible earnings trades for the upcoming week and lately we have been on a roll. Some of these trades have found their way to the Daily Watch List and some of them have become official trades for the portfolio but there are a lot of factors to consider when taking a long or short position when “betting” on earnings.
It also helps to have a good grasp on how shares have traded in the past few quarters, and sometimes over the years. One stock we followed on a regular basis a few years ago was Restoration Hardware (RH, $63.77 down $1.50) that was taken private and brought back by Wall Street in November 2012.
Shares closed north of $31 on its first day of trading and had since more than doubled in less than a year after peaking at $78.50 in mid-September.
We have always been bearish on the company as they seemed to miss earnings on a regular basis despite the fact that their stores were home eye candy. Their prices are expensive to say the least and that slows impulse buying and why we always have reservations on Restoration.
Shares tested double-nickels ($55) in after-hours trading last night but in “official” trading today the low has been $60.15.
The company had a decent quarter as they earned $9.5 million, or $0.23 a share, but on an “adjusted basis”, earnings were $0.32 a share versus $0.07 a share last year. Revenue reached $396 million for the quarter. The suit-and-ties were looking for $0.28 a share on $390 million is sales. The bigger news was that its co-CEO was leaving the company and one of the main reasons for the pullback in the stock.
Although we didn’t take action, here were our thoughts and chart work from Sunday night’s Weekly Wrap:
Restoration Hardware (RH, $72.52, down $0.52)
December 80 calls (RH131221C00080000, $1.40, down $0.60)
December 65 puts (RH131221P00065000, $1.35, up $0.25)
Thoughts: This was a recent IPO we use to follow in the past on a company we were bearish on when the stock traded. The company went private (or bankrupt, we can’t remember) and was recently reintroduced through the IPO.
Maybe things have turned around from a decade ago and we love their stores but we have no clue how shares are going to react. The options have a hefty premium and are overpriced and another reason we will likely sit out but it will be interesting to see how shares react.
We should have trusted our instincts because this strangle option trade would have been a whopper of a winner. The December 65 puts (RH131221P00065000, $2.45) were at $4.20 going into yesterday’s close and have traded to a high of $5.20. The puts could have been closed yesterday ahead of the event or this morning at the open and the strangle trade would have doubled as the cost for both options on Monday morning would have been roughly $2.75.
The December 80 calls were at 40 cents going into yesterday’s close and have dropped to a nickel. They could be closed at current levels or you could let them ride into next Friday as the profit would have already been booked.
We should have pulled the trigger on this trade for the Weekly Wrap but again, we were a little worried about overpaying on the options. These type of strangle trades are also called “chicken trades” because the direction of the stock is uncertain to the investor so leverage is used.
There are a few earnings trades we like for next week so make sure you read our Earnings section in this Sunday’s Weekly Wrap.
We were betting on a bounce today by the bulls but what we were worried about was an opening pop and drop. That happened but the bulls seem to be recovering and are pushing higher ground as the second half of trading gets underway.
The Dow is up 36 points to 15,776 while the S&P 500 is higher by 2 points to 1,777. The Nasdaq is advancing 7 points to 4,005 and the Russell 2000 is jumping 6 points to 1,109.
We have some last minute updates on our current trades and we could have a Profit Alert for our Weekly Wrap before the close. If you don’t hear from us before the bell, we will be back Sunday night with the Weekly Wrap and on Monday morning with the Daily. Until then, have a great weekend everyone!
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