This Market Leader Controls the Whole Shebang

Leader Controls the Whole ShebangIn the universe of companies that make up the stock market, there are actually very few good businesses. I’m talking about mature, large-cap businesses that are market leaders with proven track records of wealth creation for stockholders.

Previously, we looked at MasterCard Incorporated (NYSE/MA), which is a really good business. The great thing about a credit card company is that they get paid from all participants in a transaction; it’s kind of like licensed loan sharking. Plus, MasterCard is a market leader that’s rarely down for long on the stock market.

Another very good business is a company called Luxottica Group S.p.A (NYSE/LUX), which is a company that’s likely selling its products in your local town. Luxottica is an Italian-based company that makes eyewear, and here’s the great thing about this market leader—it owns the whole distribution channel, from the wholesale warehouse to the retail outlet.

Luxottica sells a number of its own house brands, like Ray-Ban, Oakley, Revo, and Vogue; it also manufactures licensed brands for Anne Klein, Brooks Brothers, Bvlgari, Burberry, Chanel, Club Monaco, DKNY, Donna Karan, Polo Ralph Lauren, Salvatore Ferragamo, Tiffany & Co., Tory Burch, and Versace, to name a few. These are all market leaders in the retail space and Luxottica has a hand in them all.

And it doesn’t end there. Luxottica not only makes eyewear for all the big brands, but it owns a lot of the retail eyewear stores, including LensCrafters, Pearle Vision, Sears Optical, Target Optical, OPSM, Laubman & Pank, Budget Eyewear, Ilori, Sunglass Hut, Optical Shop of Aspen, Oliver Peoples, David Clulow, Bright Eyes, and Oakley O’ Stores and Vaults. At the end of 2011, the company had 7,042 retail stores, meaning that it basically controls the eyewear market, holding a majority market share. (Source: Luxottica Group S.p.A web site, last accessed February 13, 2013.) Luxottica might not be called a monopoly, but it’s awfully close.

Being a good business and a market leader, Luxottica isn’t down for long on the stock market. Its track record supports the case that the stock would be worth accumulating when it’s down. If you have to wear glasses, you know how much money you can spend on this stuff. The company’s long-term stock chart is featured below:

LUX Luxottica Group SPA stock market chart

Chart courtesy of www.StockCharts.com

I’m not very enthusiastic about the stock market’s prospects this year, but the prospect of market leaders going down in value is another story. We had a really strong start in January, but there hasn’t been any follow-through so far in February. Realistically, the fundamentals don’t support a rising stock market with revenue and earnings growth being so modest.

Therefore, investors need to focus on individual businesses—those market leaders that, if they pull back on the stock market, will be worth buying.

My gut says that the mini-bull market, which is really just a recovery from the 2008/2009 stock market collapse, is over. Where this market is headed is anyone’s guess. If market leaders, like those on our list of highlighted “super stocks” (see “Super Stocks—Great Companies for Any Stock Market Portfolio”), pull back significantly, they will be worth buying.

The fundamentals might not support a rising stock market, but they do support growth in the eyewear market. Market leaders like Luxottica have staying power through recessions and the business cycle. I suspect that the U.S. economy will soon experience another change in its business cycle.