RH is an attractive but risky buy due to potential for big profits ($400-$550 target in 36 months) outweighing weak balance sheet concerns.

Next, let's talk about the new stock I bought today. Why I bought it, how much I will invest in it, and what my future plans are for this particular stock. This is RH. I posted this in my private group this morning, which shares I bought, right?

And I said, "Hello everyone, I've started investing in a new stock in my private portfolio, so I thought I'd let you know." This is RH, it's a bit risky to buy it a few days before the earnings report.

So the earnings report is coming in less than 48 hours, but I have only invested 25% of my comfortable investment in this stock.

We'll see how the earnings report comes out and if I like, I can make this position bigger in the next 3 to 6 months and maybe add it to the public account as well, but we'll see when that time comes.

So I added 420 shares. I bought these shares as an initial position at $142.43. Okay. Now, why did I do this? This stock has the potential for big profits.

Okay. There are risks involved, and I want to talk about both sides because it's important to consider both when buying stocks. So what you need to understand about RH is that it is a very high-end furniture company. Okay. So that's a thing.

Their business has three main pillars or three growth drivers. Okay. One is their high-end furniture. For example, I decorated my previous house entirely with RH furniture. This current house, which we built this year, this house is also completely furnished with high-end furniture, right?

And they sell very expensive, very beautiful, very good, high-end furniture to people who have a lot of money, okay? It's a way of doing business for them, a way of making income, and that's the main way.

Their second way of earning income is through their memberships. Basically, you pay a fee of $200 per year to get RH membership. This is a membership that is very reasonable to take out.

They should probably raise this fee, right? But this is a great membership. And the reason this is great is that you get big discounts when you buy furniture. Like, for a house like mine, it saves a lot of money, right?

I probably easily saved five figures, or even more, on the $200 membership fee, because with a membership you get huge discounts on furniture that you don't get without a membership, which is only $200 a year.

This membership model is very effective. Like who holds it? Like some people who only buy furniture, let's say they buy a house, buy a house for $2.5 million, and buy $50,000 worth of RH furniture, right?

They took out a membership and canceled it the next year because they wouldn't be buying any more furniture for the next 10 years. Some people do that, right? But many maintain their membership.

I maintain my membership. In addition, all those who are interior designers or associated with similar professions maintain their membership. Additionally, with membership, you get access to interior design and many other benefits.

So, many of their customers maintain memberships, which may not be a huge amount of money, but when you get $200 per customer per year, it becomes a huge amount, right?

And the third way they make money is through restaurants. Now you might think, how ridiculous! Restaurants, their restaurants are really amazing. I am fortunate to have had the opportunity to eat at some of the best restaurants in the world, including Michelin Star restaurants.

And I must say, every time I go to RH Restaurant, the food and service here is truly impressive and of high quality. They are doing really great work and their restaurants can make a lot of money.

I mean, if we talk about their Newport Beach location, as far as I know, that restaurant can make over $20 million a year. Ask anyone involved in the high-end restaurant business if they would be willing to relocate.

And basically, everyone would say, what? Rooftop restaurant earns $20 million a year! Add me to this. I will definitely do it. This is a truly incredible number for a restaurant.

So, these are our three main ways of growth. The worst thing about RH right now is their balance sheet. And that's what prevents me from making a big investment in RH, because their balance sheet is very weak. $53 million in cash.

They have a debt of $1.88 billion. They have another $467 million in debt, largely due to Gary Friedman's large buybacks at the wrong price. He made a big mistake, but it's not the end of the world, yet it's undoubtedly a big mistake.

Well, this company's stockholder equity is only $56 million, which is very small compared to its market cap of $2.7 billion. So, overall, these are the bad aspects of RH.

But on the bright side, they have invested a lot of money in various places in the last few years, which has put a lot of pressure on the business and cash flow. One of them was RH Paris, the other was RH Milan, and that was really a way for them to make a big entry into the European market and build a strong position there, right?

And the other is RH London. From what I've seen, it took a lot of money to build these places, right? And these places have basically opened within the last year, right? Now, this is very important because these places, instead of being a burden on the business, are now starting to bring profit to the company. This is quite significant.

Imagine, they spent billions of dollars building and decorating these incredible properties. You are not earning any money at that time. But when you open the doors and the flow of customers increases, the situation changes; Where there were big losses before, profits are now starting to come in.

Currently, from what I can gather, RH has not detailed exactly how much these places cost. However, it easily seems like $30 to $60 million or more, as flagship locations like RH Milan, London, and Paris are not uncommon.

Incredible place. So it's important to keep this in mind and I think it will play a significant role in RH's profits and cash flow in the next few years.

The next thing is the RH Newport Beach location. I knew it was going to be a great location, right? It opened at the very end of 2024, so 2025 was the first full year for this location, right?

Gary Freeman said this is RH's second $100 million-plus retail gallery, joining the location in New York City's Meat Packing District. And what's even more amazing is that this restaurant is supposed to generate over $20 million a year, which is a really big number.

A completely incredible number, right? So it's worth considering.

Currently, the condition of this stock has been very bad in the last five years. This is not a good thing at all. That is, the stock has fallen 80% in the last five years, right?

I might not be getting the lowest price for RH, right? But I think I'm getting close to starting my investments. Can RH drop to $100 or $90? Maybe it can, right? But I think I might not be able to buy at the absolute lowest level, but I'm somewhere close.

Okay. Now, look at the profit potential in RH. And that's why this stock is so attractive. Listen. You might say, "Why would I be willing to take a risk on a stock like RH, which has a bad balance sheet?"

The point is this. RH stock is likely to reach $400 to $550 in the next 36 months. I can't find many stocks that seem to have a realistic chance of tripling profits in the next 36 months.

This is quite a rare thing. So when I look at RH from that perspective, I think, "Oh, there's a big potential for profit here, but there's also a risk, right?"

So for the next three years, I look at it this way. Over the next 36 months, I think the probability of RH going bankrupt is about 10%. Let's say RH's financial condition continues to deteriorate.

And if I hold on to it until the end, I could lose 100% of my invested capital, right? But that's only a 10% probability, because it would take a lot of bad situations for them to go bankrupt, like nobody's buying expensive furniture, nobody's going to their restaurant, and they can't raise capital anywhere.

All in all, it's a very bad situation. Anyway, anything is possible, but I'm putting it at a 10% probability.

I think there's about a 20% chance that this stock will be below $140 after 36 months, but they won't go bankrupt, right? So, for me, it's basically a 30% chance that it's going to be a loss.

Now the question is how much money There may be losses.

There is about a 20 percent chance that I will make some profit from this stock, but it will be a small amount of money in the next 36 months and after 36 months it will be worth between $140 and $200.

I think the stock has about a 30 percent chance of going from $200 to $400. So, we can say that it will perform much better than the S&P 500, right?

And I think the stock has about a 20 percent chance of going above $400 in the next 36 months, which is a big profit opportunity for me. So, I look at it in a 2:1 ratio, where it has the potential to be a big profit source for me.

More than the risk of bankruptcy, right? All in all, I think there's a 50 percent chance that this stock will make me a significant amount of money over the next 36 months. And that's why I think RH is a pretty attractive stock.

Although there are some risks involved right now.

Speaking of the stock, I only made an initial investment of $60,000. I'll watch these earnings reports. These earnings reports will be out in less than 48 hours. If I like what I hear or see on the conference call, I'll do it.

I might take it to a bigger position. I might even add it to the public account, which is a higher level of respect. Being in the public account is a big deal.

Getting in there means you've reached a big level. So when I look at RH Look, I think if everything goes well, I can add it to the public account. Now, let's say RH's financial results are pretty good, but the stock price skyrockets.

I could then sell it a few weeks or a month later for a short-term profit and make $10 or $20,000 in a few weeks, and then I could invest that $60,000 with $10 or $20,000 in capital somewhere else.

That's always a possibility, right? Hmm, there's a possibility that I might not like what I'm seeing or hearing on the conference call and it might scare me, so maybe I'll keep the $60,000 I invested, but I won't add it to the public account. That's a possibility.

The best thing is if the stock is below 150 and I like what I'm seeing in the numbers and what I'm hearing on the conference call, then I'll start increasing my investment in RH.

But remember, when I say increase my investment, I mean Not that I could take it to a huge position. I would probably feel comfortable investing $250,000 in RH. That's about right for me, given my portfolio and my net worth.

It's not a huge number. It's a number that matters. Like, if that $250,000 becomes $750,000, that matters, right? That's a great return.

But I wouldn't bet everything on a stock like RH. RH is not the kind of stock that I would invest a million dollars in. It's not Meta. It's not AMD. It's not that kind of stock, okay?

It's a company that has been through a very bad time in a cyclical market.

You could have said that about RH 5 years ago. If you go back 5 years. RH was making so much money that they didn't know where to put it. And you could say, 'Oh my God, RH is making so much money.'"

"I have to buy it for 700, 600 or whatever the price is, okay?" "And because it's on its way to 1,500. It's on its way to 2,000. Okay? And you've had 80 percent negative returns in five years. That's pretty harsh, right?

And I saw RH do the exact same thing. RH shares in 2016 were probably... I think it was 2016. Um, let me look it up. Okay, I'm looking at this on my other computer, so you can't see it, but I think RH was like $20 a share in 2016.

So 2017. So in 2017, RH was $27 a share. $27, this is January 2017. It was in the 20s. Okay, let's go back in time, RH was $693 in April 2021. See, that's what cyclical stocks are like, man.

Like, nobody wants them. And if I go back even earlier than that, like in October 2015 RH was $142 a share. So, it was $142. October 2015. Let's go back to January 2017, RH is $27.

$27. Then from January 2017 to December 2019, the stock went up to $212. That's about 10 times, right? What is it? 9 times or so. Then from December 2019, it went down from $212 to March 2020.

The share price went down below $100. Then from March 2020 to August 2021, the stock went over $700. So that's all I'm saying. These kinds of stocks can be incredible.

So if RH goes from 142 to 100 in the next six months, I wouldn't be surprised. If it goes from 142 to 280, I wouldn't be surprised. It's a cyclical company and these companies are very volatile.

I mean, it's incredibly volatile and the swings are very drastic, and if you're not mentally prepared for it, it can be very dangerous, right?