John Ballard, The Motley Fool

Sat, Jun 21, 2025, 1:10 AM5 min read

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Sometimes Wall Street can be very slow to understand the real value of a business. The competitive advantage and growth strategy of a company can be misunderstood, leading to depressed valuations and underperforming share prices.

Investors who can see through the stock volatility and focus on the key signals that set a company up for long-term success can be rewarded with outsize gains over time.

Here are two stocks of market-leading brands that are trading well off their previous highs and could be significantly undervalued.

RH (NYSE: RH), the company formerly known as Restoration Hardware, emerged as a prominent luxury furniture brand over the past decade. In the past year, however, the business struggled with several macroeconomic headwinds, such as a weak housing market and uncertainties over tariffs.

Questions about near-term demand have sent the stock down 52% this year, but this is a great buying opportunity for a long-term investor.

RH's trailing-12-month revenue of $3.3 billion is below its previous peak of $3.9 billion a few years ago, but it just reported a strong first quarter. Revenue grew 12% year over year in the quarter, outperforming the rest of the industry.

RH is expanding its addressable market to hospitality offerings in its design galleries, such as restaurants and wine bars, which has elevated the shopping experience to something that cannot be replicated by e-commerce competitors.

Moreover, the company entered the $200 billion North American hotel industry with RH Guesthouses, and it offers much more, including private jets and luxury yachts for charter in the Caribbean and Mediterranean. All this creates an ecosystem of services meant to showcase the RH lifestyle and raise the brand to something more than just furniture products.

It's for these reasons that RH has a history of reporting much higher margins than the average furniture store. Its adjusted operating margin was 7% in the first quarter, below its previous 10-year average of 12%. It should return to those higher margins in a strong housing market, and this is not reflected in the stock's valuation.

Over the last 10 years, the stock traded at a price-to-sales multiple ranging from 0.48 to 6.59. The average was just over 2 times sales, with the stock currently trading at a multiple of 1.16. Investors who buy shares at these lower discounted prices and hold until the housing market is fully recovered should be well rewarded.