Luxury stocks were a big money-maker for many investors a few years back, but lately the biggest names in luxury goods haven’t fared so well.
Check out this comparison of returns:
- Polo purveyor Ralph Lauren (NYSE:RL): Up 35% in 2010, but up less than 2% in the last year
- Luxury icon Tiffany (NYSE:TIF): Up 42 %in 2010, but down 12% in the last year
- Handbag maker Coach (NYSE:COH): Up 49% in 2010, but down 9% in the last year
- Watch winder Fossil (NASDAQ:FOSL): Up 115% in 2010, but down 12% in the last year
So is luxury dead? Yes — and China is killing it.
From automakers to fast-food joints to luxury stocks, everyone has been banking on the China miracle to keep growth, well, miraculous in the face of macro difficulties. Oops — it appears that growth ain’t happening, or at least, not at the pace corporations need to keep up their momentum.
There are no shortage of recent headlines about the slowdown, so I’ll share just a few that are the most recent:
- China’s largest steelmaker shuts its mill down. (AP)
- China industrial profits drop for fifth month. (Xinhuanet)
- Caterpillar cut its forecast thanks to China’s slowdown. (InvestorPlace)
This narrative of cooling growth isn’t new. But what’s been emerging lately is the particular pain it’s causing for luxury stocks.
Premium carmakers have been hurt as China sales slow. Here’s the best quote from that Reuters article if you’re too busy to click through:
“The Chinese have overconsumed premium cars in recent years,” Singapore-based Bernstein analyst Max Warburton wrote in a study published on September 25. “Right now, we see a number of risks to sustained high profits from China.”
And broadening the scope beyond high-end autos, take this gem from The Wall Street Journal:
Retail sales of jewelry, a proxy for the health of the sector, have fallen from 56% year-on-year growth in 2010 to 45% in 2011, and 16% so far this year.
So, where are those luxury stocks going to find customers? Not the dumpster fire that is Europe. America maybe, but I have a feeling that the whole 47% debacle by Mitt Romney isn’t going to spark a lot of wealth-flaunting anytime soon.
In other words, China was it. And as luxury goods sales there die, so do the hopes for luxury stocks.
Before you throw a stock like Michael Kors (NYSE:KORS) in my face, which has doubled in the last year since its spectacular IPO, keep in mind that I happen to traffic in superlatives even though the world is rarely black and white.
When I say “all luxury stocks are dead” what I really mean is “the majority of luxury stocks are seeing significant headwinds, and the sector is weakening — though there may be one or two companies that buck the trend. And of course eventually, the sector will come back again when there is a secular recovery boosting consumer spending.”
There will always be high-end companies that fare well, but a few tech stocks or retail stocks or whatever stocks will also always soar. Just because one outlier justifies that old platitude that it’s a “stock-picker’s market” doesn’t mean you should let that outlier upend a broader sector analysis.
So I reiterate: Luxury stocks are dead.
- A big driver of China luxury goods sales is, unsurprisingly, graft for elected officials. (China Real Time)
- Why China’s slowdown may get worse – permanently. (New America Foundation)
- An older story, but useful on the myth of cultural conflict in regards to spending vs. saving in China. (Foreign Policy)
- People’s Bank of China sees no sign of a rebound. (WSJ)
- For a different point of view (not on luxury stocks but on China), the chairwoman of Atlantis Investment Management thinks now is the “perfect time” to buy China. (Bloomberg video)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via@JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.