Investing Theory

The Ultimate Guide to Buying Luxury Stocks

October 12, 2023

What is luxury in the context of the stock market? We have all surely heard about the famous S&P Global Luxury Index and are well aware of brands like LVMH Moët Hennessy or Louis Vuitton. But does it apply just to so-called high fashion?

The luxury sector has been doing well for years, despite the volatility associated with the Covid-19 outbreak and high inflation. It would seem to be indestructible - and at first glance, is a good stock sector to consider for long term investments.

However, what is the truth? Are high end luxury goods companies the ideal remedy to enrich a diversified investment portfolio, and are they an evergreen good bet? What is a good stock price for those firms' shares? Read our post - and see if the reliance on sales of unaffordable clothing, watches, and jewelry is really as attractive investment as it looks!

How to Find the Best Luxury Brand Stocks?

What, in fact, are luxury goods? The easiest way to describe them is as expensive products that people want, and don't actually need. But it's not all about the money - the aspect of their exclusivity, unavailability and the role played by the brand are also important. As a rule, they should be higher-quality goods, defining status for their owners.

The best luxury stocks, by definition, therefore meet the following three criteria: strong brands, high end and timeless products, with high operating margins. As you can see for yourself, they do not apply to the broader market - they are kind of complete opposition to consumer staples.

Importantly, you must remember that the luxury market is not just about clothes and accessories: the best luxury stocks come out far beyond Burberry, Jimmy Choo or Saint Laurent.

So what is there to choose from? Let's take a look at the following example:

Luxury goods companies: sport cars, furniture and retail/other (LVMH: moet hennessy louis vuitton)

As you can see, it's not just about the retail. The most common search for luxury stocks will find a breakdown of categories such as:

  1. Durable Goods (or Hard Goods) - companies that sell luxury goods that have a useful life of more than three years; these categories include jewelry, cars and furniture.
  2. Consumables (or Soft Goods) - luxury brands operating in the field of manufacturing products with a useful life of less than the already mentioned three years, e.g., textile and clothing manufacturers.
  3. Services - luxury brands providing splendor services, such as hotels and casinos.
Top luxury stocks: a breakdown of categories.

Luxury Stock and Luxurious Profits: Global Luxury Index

To begin with, an interesting fact - high expectations sometimes bring somewhat less expected effects. Stock prices of some of the largest luxury houses have significantly outperformed the overall market valuation. The famous S&P Global Luxury Index returned as much as 13% for the past year - which quadruples the S&P 500.

Importantly, it's also worth noting that there aren't many luxury ETFs (exchange traded funds) on the market - which, in a nutshell, translates into the fact that investors often focus exclusively on underlying stocks.

An Investor's Cheatsheet: From LVMH to Tesla

Long term investors have already noticed that investments in luxury stocks, although they are not the mythical hen that lays golden eggs, are quite stable.

Of course, a huge drop in consumer spending would hurt these stocks - like any other. However, the audience of luxury companies is really specific - and that's why the stocks of such companies perform much better on an annual fiscal year basis than those of other brands and cheaper consumer products.

So which luxury product brands specifically are worth investing in? Check out our picks!

1. LVMH Moët Hennessey Louis Vuitton SE (MC.PA)

When it comes to stability, more than LVMH did probably cannot be achieved. At the moment, it is the largest luxury company, valued at a dizzying $300 billion. LVMH executives are going really wide with their product line, holding stakes in sectors such as spirits, leather goods, high fashion, accessories, and perfumes. What's more, it keeps investing in new companies - including becoming the owner of the famous Tiffany in 2021 - so one can confidently assume that investing in their share prices will be a good choice.

Including it on this list is not based solely on the fact that another company was acquired - by the way, check for yourself the current valuation shown in the screen below:

Views from the tool: P/S Ratio and P/CFO  versus 5Y Median

Also, the earnings in the next 2 years will increase over 30%, according to Wall Street analysts:

View from the tool: EPS Estimates

2. Tesla Inc. (TSLA)

To start with, a handful of facts. Last quarter, shares of the car manufacturer rose as much as 74%, which is undoubtedly good news after the turbulent period in 2022.

It may seem that thanks to the hype on AI, the company should score only increases - however, Tesla is a rather peculiar case due to the personality of its owner, namely Elon Musk - who likes to take, to put it mildly, rather unpredictable actions.

So why should you invest in Tesla? The company will soon launch the highly anticipated Cybertruck pickup model (no specific date was given, but the preliminary announcements are for the second half of this year. However, given the fact that the end of the year is near, and signs of deals are aplenty - it's hard to say precisely when the date will come. In addition, it's worth recalling that the Model 3 Sedan and Model Y crossover (sold in rather "low cost" as for most Tesla models) are still among the top 10 cars in the US. It is this stable, strong demand for this particular brand that makes Tesla a good choice for investors.

On the one hand, some doubts arise in the context of Tesla — related to the aforementioned Cybertruck — analysts are not unanimous on whether it will be released on time and its quality. On the other hand - we must remember that Tesla recently won recognition from Kelley Blue Book (KBB), which is a recognized California-based research corporation responsible for vehicles valuation and advanced automotive research preparing. According to specialists from this organization, Tesla was "the best overall luxury brand in April 2023."

View from the tool: Annual Revenue Estimates

3. The Swatch Group AG (VTX:UHR)

Swatch Group is a Swiss watch manufacturer. The company was founded in 1983 by Nicolas Georges Hayek - and rightly enjoys the best reputation for the highest quality. In addition to design itself and the sale of ready-made watches, the company is also developing through segments such as Jewelry and so-called Electronic Systems. Importantly, it is worth noting that Swatch is also the owner of such iconic brands as Longines, Tissot and now the legendary Omega. Interestingly - the demand for the latter brand is so great despite the really high prices, that the brand even has a backlog of orders, and customers have to wait patiently for the desired goods.

If you are looking for growth in your portfolio, it is worth betting on this company - it has great potential and huge prospects. Moreover, experts at Simply Wall Street expect that earnings will grow by a double-digit 14% over the next few years.

Views from the tool: EPS estimates and estimated EPS long term growth.

Luxury Companies That Pay Dividends: a Long Term Strategy

It may seem counter-intuitive to you, but experts recommend luxury stocks... to dividend investors. Why? Because they help increase the total return of a portfolio by paying dividends, while tending to increase in value rapidly.

The entire luxury goods industry works like a kind of proverbial perpetual motion machine: much wealthier people often have a lot of their wealth tied up in the stock market. During prosperity time, they get richer and can afford to buy more luxury goods, increasing their outlays for these purposes. It is precisely because of this that companies selling luxury goods are so stable - they have rich customers who do not change their consumption habits even at times when most of the average mortals are facing the effects of economic hardship.

Of course, this information is encouraging if you are tempted by the diversification of your portfolio made by using luxury companies. However, for those of you who are attached to dividends, things can get a bit complicated - not all companies included in the Global Luxury Index pay regular dividends.

That's why we'll make your task easier - in the table below, you'll find examples of those companies that are included in this key index, and at the same time have been paying dividends for years:

Global Luxury Index: product producers who pay dividends.

Luxury Stock: The Bottom Line

Let's put it bluntly: regardless of the times, the rich are getting even richer, and luxury goods companies are only benefiting from this. And these are not empty words - the S&P Global Luxury Index has gained +12.6% over the last year.

The economy is surprisingly well considering recession fears (enough of an 11.5% climb for the S&P 500 after last year's bear market) - and so are investors and luxury stocks. However, it is always worth keeping in the back of your mind that there are no businesses that are 100 percent immune to economic cycles or other market vagaries. Luxury goods stocks are rather stable and most companies from this sector have been doing well for centuries - just to mention The Estée Lauder Companies Inc, Mercedes Benz Group, Harley Davidson, Capri Holdings or Cartier watches.

So it's worth approaching the subject sensitively - and as an investor, appreciate luxury goods stocks because of their wide profit margins.

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