When we last checked in on our pick for this year’s Best Stocks for 2022 contest, Arhaus (NASDAQ:ARHS) stock was down 65% year-to-date. Now, it’s “only” down 40%. Progress? Actually, it’s opportunity.
Look around — the Fed, inflation, supply and labor shortages, and a war raging in Ukraine have all contributed to the dour returns of 2022. That said, we’re confident that we are one big final selloff away from a true market bottom and a massive risk-on reversal.
In fact, I’d say we’re just a few weeks away from a massive market turning point. During which, we’re going to see a generational buying opportunity much like we saw in the aftermath of the 2009 financial crisis or the 2001 dot-com crash.
Here’s the story.
What’s Ahead
The Fed has made it abundantly clear that it plans to continue increasing interest rates to squash inflation. Meanwhile, the economy is slowing, which could result in a recession. The stock market is already pricing in a mild recession, but not a deep one, which could very well occur depending on Jerome Powell’s policy decisions.
The threat of a deep recession will result in topsy-turvy price action over the next few weeks, leading to selloffs in growthy names like Arhaus. Put it this way: If the S&P 500 falls 5%, growth names could fall 10%.
But here’s the thing. The deep recession that’s weighing on stocks right now and over the next few weeks simply will not happen.
Meaning this is a huge buying opportunity.
Allow me to elaborate…
Have you ever heard of the “Nifty 50”?
These were the fifty most popular large-cap stocks on the market back in the 1960s and 1970s. Most stocks on this list rocked sky-high price-earnings (P/E) ratios, and they led the bull market of the early seventies.
The list comprised now-household names — such as McDonald’s (NYSE:MCD) and Disney (NYSE:DIS) — becoming the fastest-growing stocks in the world and singlehandedly putting growth stocks back in vogue. But after the Watergate scandal and Vietnam War, rising energy prices and interest rates sent the market into a tailspin, tanking the high-valuation companies of the Nifty 50.
It’s not unlike the situation we find ourselves in today.
The story typically ends there for the Nifty 50, but there’s a very good lesson hidden within this chapter. Research tells us that if you had bought those Nifty 50 stocks at their peak in December 1972 and held through the market storm, their returns would eventually match those of the broader market. More relevant to us, however, is that buying the 25 cheapest Nifty 50 stocks, even at their peak, would have outperformed the market in the long term.
That’s where we are with Arhaus.
The Arhaus Advantage
Arhaus is a high-growth company trading at a discount to fair value. The company currently trades hands at just 15X sales. It’s a steal, and it could reward investors handsomely should they buy ARHS stock before the market propels it higher.
While most consumer discretionary stocks are experiencing a demand slowdown amid supply chain issues and rising costs, Arhaus is growing revenue and brand momentum. Just check out this chart from Google Trends, which shows interest in the term “Arhaus” steadily rising since 2020:
While a deep, prolonged recession would weigh on the housing market, causing a furniture retail slowdown, Arhaus now has enough brand cache, demand and pricing power to navigate such a scenario.
Further, research has shown that ecommerce activity tends to increase in locations with a brick-and-mortar presence, of which Arhaus has plenty to tap into. The company sports 80 retail locations spread across 28 states, plus an ecommerce channel. This physical-digital mix also allows it to sell and deliver products quicker (and cheaper) than many of its competitors.
Half of its product lineup is U.S.-made, which allows the company to mostly sidestep supply-chain issues. The same can’t be said for its competitors in the luxury furniture market, of which it commands a 3%-4% market share. The market for luxury furniture is highly fragmented, however, so there’s plenty of opportunity for Arhaus to grow its share.
In fact, Arhaus now has a distribution center in Dallas. Moreover, it is beginning to bear fruit over its previous distro centers in Ohio and North Carolina. That’s because there are six Arhaus showrooms in the West, which is a logistical and operational dream. And management expects to open five to seven new stores over the coming years, using its aforementioned distro center as a catalyst for growth in the West’s most lucrative markets — California and Texas.
The Outlook for ARHS Stock
I’ll state the obvious here and say that, in a deep recession, it’s highly likely spending on luxury items will slow down before spending on consumer necessities. That said, the odds of a deep recession are slim to none in my book.
Buying and holding depressed high-growth stocks through periods of market volatility is a recipe for massive returns. (Remember the Nifty 50!) So long as the company’s underlying financials are strong, there’s no reason to think ARHS stock will stay down in the dumps.
And its financials are indeed very strong.
By 2021’s end, Arhaus’ revenues surged by nearly 60% to $796.9 million. And the luxury retailer should hit between $1.173 billion to $1.193 billion by the end of 2022. That’s year-over-year growth of nearly 50%.
Meanwhile, Deloitte forecasts a retail sale surge of 4% to 6% this holiday season, with just shy of $1.5 trillion exchanging palms between November and January. That math is simple — the more money folks are willing to spend this holiday season, the more money Arhaus can potentially capture.
Beyond that, Arhaus is firing on all cylinders heading into 2023.
The future is pretty nifty indeed for Arhaus.
On the date of publication, Luke Lango did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.