Roughly a year ago, rocked by plunging stock portfolios, the prospect of massive layoffs on Wall Street, and the shock of the Bernie Madoff hedge fund scandal, the Rich abruptly went into hibernation. Lavish holiday parties got cancelled or scaled back; designer gowns languished in closets; jewelry stayed in bank vaults; and empty storefronts multiplied in Palm Beach.
There was talk of a permanent shift away from conspicuous, frivolous consumption and a newfound appreciation for the timeless virtues of friends family, and home cooking.
That was then.
Last week I heard from someone who had sold her $3.5 million one-bedroom Manhattan apartment after it languished 18 months without a bid. On Nov. 4, an auction of Impressionist and modern art at Sotheby’s brought in $182 million, well above estimates. Nov. 5 brought news that October retail sales at high-end Nordstrom and Saks rose for the first time since May and June 2008, respectively. Like the swallows flocking back to Capistrano, the Rich have returned.
The unemployment rate may still be rising, but many of these people don’t work anyway, living as they do on interest and dividends. What matters to them isn’t unemployment at 10%, but the Dow Jones Industrial Average at 10,000.
You don’t have to be rich or even admire them to make money off them. Quite a few companies that cater to the wealthy are publicly traded, and several firms, including Merrill Lynch and BNP Paribas have put together luxury stock portfolios. BNP’s version, the World Luxury Index, includes 20 luxury purveyors and trades on Deutsche Boerse. At a recent 72 euros, it hit a 52-week high on Oct. 12 after trading as low as 39 euros in March.
As trading in the index suggests, investors have been betting on a luxury comeback for months, and the best time to buy luxury (along with everything else) would have been earlier this year. But the index is still far from its all-time high of over 105 euros, reached back in 2007, suggesting further gains are in store. The recent rise certainly hasn’t been supported by earnings, which are still depressed. Even as it celebrated the results of last week’s auction, Sotheby’s reported a third-quarter loss of $57.8 million on a 41% revenue drop.
That should change as wealthy buyers open their wallets and sellers show a renewed willingness to part with masterpieces, rather than the mostly lackluster works they’ve consigned during the recession. And more generally, having slashed costs and inventory to survive the worst of the downturn, purveyors of luxury goods should be poised to gain.
Back in January 2008, I recommended (and bought) French luxury conglomerate LVMH Moet Hennessy Louis Vuitton. (See “Luxury Stocks at a Discount.”) As I said then, “Here's the thing about American consumers, and especially the rich ones: Sooner or later, they always come back.” The reasoning was sound, but turned out to be nearly two years premature. Back then I had no idea the recession would be so severe, or the stock market slump so deep. LVMH shares kept dropping, eventually trading at less than half of what I paid. But this year they’ve rebounded strongly, and I’m now showing a slight gain.
I still recommend LVMH as a one-stop luxury stock. It’s practically a diversified luxury index in itself, with operations in high-end fashion (Louis Vuitton, Givenchy, Donna Karan), champagne (Dom Perignon), perfume (Dior), and jewelry (the De Beers retail brand, under a venture with the diamond giant). I bought my shares in their French listing, but they’ve since been listed over-the-counter as American Depositary Receipts (LVMUY) as well.
I’ve also put together my own Common Sense index of luxury stocks. In my opinion, the others aren’t exclusive enough. The BNP Paribas index requires only that companies derive at least 50% of their revenue from luxury products. My index includes just seven stocks in addition to LVMH: Christian Dior (fashion); Richemont (watches); Hermes (fashion); Porsche (autos); Bulgari (jewelry); Tiffany (jewelry) and Sotheby’s (fine art auctioneers). An advantage for investors looking for geographic diversification is the extent to which European companies dominate the list -- suggesting that when it comes to luxury, the Europeans still have cachet.
Investors might also want to consider companies in what I call my near-luxury index: Saks (retail); Nordstrom (retail); Burberry (fashion); Toll Brothers (housing); Starwood (hotels) Polo Ralph Lauren (fashion) and Coach (fashion). This is an upper-middle-class niche where Americans seem to excel; even a British icon like Burberry is run by an American.
Most of these stocks are near their highs for the year, as are the major indexes, and therefore I don’t consider this an auspicious time to be adding to stock holdings. But there’s nothing wrong with adjusting your portfolios if you believe, as I do, that the luxury segment is poised for further gains as the recovery strengthens. One strategy would be to sell defensive consumer positions, like Wal-Mart or even Amazon.com, and buy more high-end consumer discretionary stocks. Or you can add these to your list for when the inevitable correction arrives.
Enjoy the shopping. Unlike a new designer dress or luxury car, luxury stocks shouldn’t depreciate the instant you buy them.
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Luxury brand stock picks (Via WSJ) - http://bit.ly/2UsASb
The rich are back and you can profit (Via WSJ) - http://bit.ly/2UsASb
Optimism may be down: http://www.denverpost.com/ci_13759023 But conspicuous consumption is on the rise: http://tinyurl.com/ybfry5o
The Rich Are Back, and You Can Profit: I still recommend LVMH as a one-stop luxury stock. It's practically .. http://bit.ly/4jPbdm
The Rich Are Back, and You Can Profit http://bit.ly/2vYEop
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