“Know what you own, and why you own it. Understand the nature of the companies you own and the specific reasons for holding the stock. (“It is really going up!” doesn’t count.)” — Peter Lynch The best luxury goods are typically “better quality” than their cheaper counterparts in the sense that they are more durable. In the same vein, the stocks of those luxury goods makers also tend to act in a similar manner when market conditions get tough. When volatility picked up last week it was the luxury goods segment that stumbled the most – which is something we haven’t seen for a while. Today, we are taking a look at luxury goods stocks, some of which have managed to outperform in every market environment of the last 10 years. Below is the share price performance for Hermes, Christian Dior, LVMH, Kering, Estee Lauder and Richemont vs the S&P 500 (blue) and the MSCI World index (red) over the last 10 years. Bernard Arnault, who owns 48% of LVMH , rose to the top of the Forbes list of billionaires in December when he took the crown from Elon Musk. Arnault isn’t the only member of the list whose fortune comes from luxury goods. Five members of the Forbes top 50 can attribute their wealth to luxury brands like L’Oreal and Chanel. That number goes up to eight if we count Nike, Tesla and Zara ( Inditex ) as luxury brands. Clearly there is a lot of money to be made selling things to people with money. The traditional luxury brands, most of which are based in Europe, belong to the market for jewelry and watches, fragrance and cosmetics, clothing, wine and spirits. These days, automakers like Ferrari and Porsche are routinely included, and so are some newer brands like Apple, and Tesla (though price cuts aren’t typical among luxury brands, so maybe that excludes TSLA). The six stocks below are the most valuable ‘old school’ luxury goods companies that are publicly listed – along with their 12 month price returns. For a more comprehensive list of luxury goods companies, have a look at this portfolio . Brands are important for most companies, but when it comes to luxury products the brand is often the main feature. The product quality might be superior, but the brand represents heritage, prestige and most importantly, scarcity. Many of the most valuable luxury brands are more than a hundred years old, and that history can’t be replicated. The long term focus of luxury brands is good news for long term investors. By most measures, many of the companies mentioned are now trading somewhere between fair value and overpriced, (though you may disagree) but these companies have been around for a long time and they aren’t going anywhere anytime soon. If you want to invest in the stocks of these luxury goods brands, it’s important to be prepared. Because as they say, luck is when preparation meets opportunity. With that in mind, we as investors can: Since these luxury brand stocks rarely trade at a deep discount to their intrinsic value, we need to practice patience, and discipline. In reality, the same can be said for all investing. Luxury goods are nothing new, but LVMH is the company that put them on the map as a stock market investing theme. Starting in the 1980s when Bernard Arnault orchestrated the merger of Louis Vuitton and Moët Hennessy, the company has grown into Europe’s most valuable company. The group now owns 75 prestigious brands including Tiffany and Co, Dior, TAG Heuer and Bulgari. The companies are managed independently, while the holding company allocates capital wherever it sees the highest prospective returns. In this way LVMH is very similar to Warren Buffett’s Berkshire Hathaway. Kering which owns Gucci and Yves Saint Laurent, amongst other brands, and Richemont which owns Cartier, Montblanc and other brands follow a similar pattern. The types of brands owned by LVMH and Richemont can easily be classified as luxury goods. It’s less clear when it comes to brands like Apple, Nike and Tesla. Maybe these are better described as “premium” or “prestige” brands. Nevertheless, these companies earn margins that are much higher than their respective industries, and also have the advantage of much bigger markets. Large luxury conglomerates face an uncertain future, as the number of brands with long histories and good reputations are becoming fewer and further between through industry consolidation. In the coming years, we could see luxury conglomerates branching out into acquiring those “premium” brands as they’re more plentiful than their luxurious counterparts and more applicable to consumers. In the past, department stores were an important part of the luxury goods industry. Their place is increasingly being taken by online retailers and marketplaces like Watches of Switzerland in the UK and RealReal and Farfetch in the US. RealReal specializes in second hand goods and handled $1.8 billion in 2022, with a commission rate of nearly 30%. As mentioned, many of the top luxury stocks are potentially trading on elevated valuations at the moment. Besides valuation, here are a few things to watch out for when assessing stocks in the sector: This week is all about employment data. On Wednesday and Thursday we will see employment data (and some inflation data) from Europe. And then to the US with the JOLTs job opening report on Wednesday, the ADP employment report on Thursday and non-farm payrolls on Friday. It’s the last big week of earnings season and a particularly big week for the cloud data and software companies: Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email [email protected] Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Richard is an analyst, writer and investor based in Cape Town, South Africa. He has written for several online investment publications and continues to do so. Richard is fascinated by economics, financial markets and behavioral finance. He is also passionate about tools and content that make investing accessible to everyone.
