Why RH Stock Jumped 20% in October
Key Points
RH benefited from a broader movement into housing stocks last month.
The stock also seemed to experience a short squeeze as more than half of its shares were sold short.
Interest rates fell, leading some to bet on a housing market recovery.
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Shares of RH (NYSE:RH), the high-end home-furnishing company formerly known as Restoration Hardware, were moving higher last month on a broad upswing in housing stocks.
Interest rates started to edge lower. The Federal Reserve declined to raise the benchmark Federal funds rate, and investors rotated out of AI stocks, landing on housing stocks as one of several potential opportunities. RH also seemed to benefit from a short squeeze, as the stock had become heavily shorted after several quarters of sluggish growth. As of Oct. 15, 58% of the float was sold short.
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There was little company-specific news out on RH last month, but the rally in the housing sector was clear, and it was enough to lift the stock 20%, according to data from S&P Global Market Intelligence.
As you can see from the chart below, RH stock started moving late in the month as interest rates fell. Notably, the stock also moved up as the S&P 500 went down, showing what appeared to be a rotation out of AI stocks and into the housing sector.
RH data by YCharts
Why RH suddenly popped
Starting on Oct. 20, a combination of a short squeeze and a broader rotation into housing stocks seemed to lift RH shares. The stock jumped 5% on Oct. 20, another 7% on Oct. 21 on high volume, and then popped 9.4% on its highest daily volume since its earnings report on Oct. 22, indicating a possible short squeeze. After a brief pullback, the stock rallied again into the end of the month.
On Oct. 22, the yield on the 10-year Treasury note also fell sharply, closing at 4.95%, down 3.8% and its first close below 5% in a month. That move was a response to fears about AI spending, seen in Meta's first quarter of negative free cash flow in its earnings report the night before. It also signaled a rotation out of AI stocks and into bonds.
That pattern continued through the end of the month as tech stocks and Treasury yields fell and RH stock moved higher.
Image source: Getty Images.
What's next for RH
RH delivered better-than-expected results in its most recent earnings report as the company now sees full-year revenue growth of 5.5%-7%, even as it continues to open new galleries and pushes forward in Europe.
It will take a significant recovery in the housing market to accelerate the company's growth and boost its margins, but that will come at some point. While the Fed is not expected to lower rates, market dynamics change quickly, and investors seem to think the housing sector has rebound potential.
Investors will have to be patient with RH stock, but if momentum returns to the business, it has a lot of upside potential.
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Jeremy Bowman has positions in RH. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.
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