Change can be difficult. I was reminded of this when I saw Spencer Johnson's obituary in The New York Times.
I didn't recognize the name at first, but after reading the headline, I immediately knew who he was:
If you've ever worked for the government or in a large company, you probably read one of the 28 million copies that have been sold.
This was a short book -- 94 pages of very large type. According to the article, the book "told the story of two mice, Sniff and Scurry, and two tiny people, Hem and Haw, looking for cheese in a maze. When the cheese supply runs out at Cheese Station C, the mice leave without angst to find more. But Hem and Haw resist, refusing to accept change. Haw overcomes his anxiety and ventures out of his comfort zone — at first timidly, but then, gradually, with more confidence — in search of a new supply of cheese."
"Before long, he knew why he felt good," Mr. Johnson wrote about Haw. "He stopped to write again on the wall: 'When you stop being afraid, you feel good!'"
Johnson's obituary noted that although the book was short, it took years to write. That was because he understood something many writers fail to accept: In a 2003 interview with USA Today, Johnson noted, "Most writers write the book they want to write. You're much wiser if you write the book people want to read."
That quote may help you see why I read obituaries in The New York Times. They aren't the short death notices found in local papers. They are short biographies that serve as a daily digest of lives that are worth studying. Johnson's advice about writing sums up my strategy for stock market success.
He could have just as easily said, "Most investors buy the stock they want to own. You're much wiser if you buy the stock people want to own."
I believe that's important. We can find the best company in the world, but that doesn't mean it's a good stock to own. It's a good stock only if it goes up... and stocks go up only if people want to own them.
Simple ideas are important, but implementing simple ideas can be difficult. That is true for both authors like Johnson and investors like us.
When I look at a potential trade, I consider why other investors might want to own the underlying stock. Sometimes, the answer is that the stock offers value. At other times, technical analysis will show investors are interested in the stock. And, sometimes, I find both value and technicals support the stock.
That's the case for the most recent recommendation I made to my premium Income Trader readers last week: RH (NYSE: RH).
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My Latest Trade
You probably know RH better as "Restoration Hardware," the company's former name. But while the name has changed, the company is still the same luxury retailer selling furniture and other items for the home. The new name recognizes the company's controlling interest in Design Investors WW Acquisition Company, which owns the business operating under the name "Waterworks," a retailer of fixtures for kitchens and baths.
I've written about RH before. My Income Trader readers and I recently used an options trade that expired in July -- a trade that delivered a 3.8% profit in only 15 days -- or a 94% annualized return.
When I originally wrote about the stock on July 7, I noted that the chart was bullish. That is still true. The chart below shows that RH has continued to move higher in the past few weeks.
In its latest earnings announcement, the company missed expectations, sparking the selloff I highlighted in the chart. Since that selloff, the stock has continued to recover. As I wrote nearly a month ago, "Over the past month, traders seem to have realized the value of being something Amazon.com cannot replicate."
One thing has changed since our first trade. At that time, analysts were lowering their earnings estimates for the full year and for next year. Now, they are raising estimates. That indicates they believe the company is likely to report a strong quarter, which should boost demand for the stock from investors looking for value in the retail sector.
How I'm Trading RH
While I believe the company will be a winner in the long term, I am not ready to commit to a long-term trade in RH. It's a niche retailer. Its products are priced a little above what I believe the average household is prepared to pay, and that reduces its potential market size. That means it's likely to grow slowly, and we have already seen sales growth slow over the years.
Until the company proves it can deliver consistent growth, I am more comfortable with short-term trades in RH. That's why I recently recommended another option trade that will expire before earnings are released at the beginning of September. If the company delivers in that announcement, I will be convinced that there is long-term value in the stock.
I can't reveal the exact details of the trade to you today -- that wouldn't be fair to my Income Trader subscribers (although you could certainly make a trade on your own if you wish).
But I can tell you that based on our trade, we have the chance to generate a quick 5.5% in instant income -- while having the chance to buy RH at a 23.9% discount to recent prices.
By using this particular strategy we get the best of both worlds: quick income and a chance to buy a good company at a drastic discount. If you'd like to learn more about how to do this yourself, check out this detailed report.