1 Growth Stock Down 69% That Could Soar on Fed Interest Rate Cuts

Key Points

• RH has tumbled since the pandemic due to a sharp slowdown in the housing market.

• Despite the headwinds, the stock has delivered solid revenue growth in recent quarters.

• If mortgage rates come down, the company is likely to see a significant benefit.

• 10 stocks we like better than RH ›

Stocks are at an all-time high, as there have been plenty of winners during the AI boom.

However, one sector has been left behind over the last couple of years. Housing stocks have generally been reeling with mortgage rates still elevated and existing home sales down roughly 30% since pre-pandemic levels. That has impacted everyone in the sector, from home builders to real estate agencies to home-furnishing companies, which depend on home sales to drive demand.

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One company, RH (NYSE: RH), is still trading down 69% from its pandemic-era peak, as its business pulled back substantially in the post-pandemic era, even though it has since regrouped and is back to delivering solid growth.

The stock pulled back last week after the high-end home furnishings company formerly known as Restoration Hardware missed estimates and cut its full-year guidance. The stock fell 4.6% on the news, even though the numbers were solid considering the challenging macroeconomic environment.

Image source: RH.

Revenue rose 8.4% to $899.2 million, below estimates for $905.4 million. Demand, which is a measure of order growth, was up 13.7% in the period, even with the impact of tariff uncertainty and a weak housing market.

Despite the weaker-than-expected revenue growth, the company continued to deliver strong profit margins with an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 20.6%, and a generally accepted accounting principles (GAAP) operating margin of 14.3%.

Adjusted earnings per share jumped from $1.69 to $2.93, showing its margins are rapidly expanding, though that missed the consensus at $3.22.

Why RH could soar

It will take a lot for RH to recover to its previous peak, which came at a time when the housing market was soaring and home-improvement stocks were delivering rapid growth.

However, considering it's down 69% from its peak, RH doesn't need to get all the way back there to be a winner. In fact, the Fed rate cut on Wednesday could be the trigger the company needs in the housing market.

CEO Gary Friedman hasn't hesitated to blame what he's called the weakest housing market in 30 years for the company's woes, and lower mortgage rates are likely to bring more home buyers and sellers into the market. Lower rates will reduce monthly payments, and it will also encourage sellers to reenter the market as it will diminish the "lock-in effect" of the pandemic era.

As a high-end home furnishings seller, RH is well prepared to take advantage of the housing market recovery as home sales tend to trigger new furniture purchases.

The company has also expanded significantly in Europe and with new galleries in the U.S., in addition to new trial businesses like restaurants, guesthouses, and airplane and yacht charters.

While interest rate cuts in the U.S. won't directly affect the business in Europe, its expansion across the pond shows there's plenty of growth runway left for the company.

Is RH a buy?

Based on analyst estimates for fiscal 2027, which ends in January 2027, RH stock trades at a forward P/E of 18, which seems like a fair price for a stock that still has significant growth potential. Additionally, Friedman envisions expanding the brand beyond home furnishings, even flipping whole, fully furnished houses, effectively getting into the housing market, a program it calls RH Residences.

Even if mortgage rates decline, it could take time for the housing market to spring back to life, especially as the lock-in effect is likely to persist for at least some homeowners.

However, investing in RH looks like a good way to take advantage of the expected rate cuts. For risk-tolerant investors, getting some exposure to the stock right now looks like a smart idea.

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Jeremy Bowman has positions in RH. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.