Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

This Sector of the Economy Is Actually Hot Right Now

Wednesday, February 29th, 2012
By for Profit Confidential

U.S. economyWith all of the doom and gloom that we hear about on a daily basis, most of it rightfully so, there actually is one segment in the retail sector that’s doing quite well: luxury brand stocks. If we look at the overall economy, unemployment is up and jobs are scarce, for the average person. But not for the high-income, educated person with experience; their unemployment rate is mid-four percent, half the national average.

The U.S. economy is now becoming split into two parts. We shouldn’t talk about the retail sector as if it was one monolithic block. It’s essentially being chopped in two: high-end and low-end. As one can see from recent performance in the market, some of the best performing stocks are those of luxury brand stocks like Coach, Inc. (NYSE/COH), which currently sits near a 52 week high. Recent reports from Coach indicate significant improvement at the higher income potion in the retail sector.

Will the best performing stocks continue to be luxury brand stocks? That is extremely difficult to predict and much depends on whether this very lackluster economy sputters and falls back into a recession. Certainly, the additional liquidity by world central bankers has helped the higher income citizen and thus the retail sector that caters to them. Luxury brand stocks like Ralph Lauren Corporation (NYSE/RL) are still pushing near their 52 week high. Michael Kors Holdings Limited (NYSE/KORS), a hot new initial public offering in the high-end retail sector, has doubled its share price since it went public this past December.

Wyndham Worldwide Corporation (NYSE/WYN) had some interesting comments recently regarding the higher income traveler and luxury brand stocks in general. Wyndham, one of the best performing stocks over the past year, has a variety of hotels and vacation rental properties in all income sectors. The company recently stated that, in the higher-ticket segment, arrivals to its resorts are reaching an all-time high. This is reflected in its stock at a 52 week high.

Another part of the retail sector and one of the best performing stocks is Diageo plc (NYSE/DEO). Sales of liquor continued at a strong pace in its deluxe and super deluxe segments. The company sees better consumer confidence at the high-income level.

Now that we’ve looked at some of the best performing stocks in the retail sector, the question is: can luxury brand stocks continue to outperform? That is a tricky question, as much depends on more than just analyzing a business model. First off, anytime a stock is at a 52 week high and one of the best performing stocks, you need to be careful of being last to the party and buying at the high.

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Luxury brand stocks in the retail sector have done well since the markets overall have done well recently. As higher-income people have investments in the markets and central banks are flooding the system with more money, this will push up asset prices, which makes someone invested “wealthier.” Also, the skills at the higher-end of the market are in short supply. If one was a computer programmer, mathematician, scientist, engineer, doctor and so on, these are areas where the U.S. is in short supply. The unemployment rate in these sectors is far below that of a laborer or a factory worker.

With the huge move we’ve seen in luxury brand stocks in the retail sector and the market overall, caution is warranted, especially with the European situation still not settled. Having said that, if we look out over the next decade, one approach would be to look to be bullish luxury brand stocks in the retail sector as long as the monetary authorities are adding money into the system. When central bankers decide to take away the “punchbowl” and reduce stimulus, then it might be time to step to the sidelines.

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Sasha Cekerevac - Investment Advisor, Fund AnalyzerSasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what to look for as an investor. His newsletters provide an experienced perspective on what the big funds are planning and how you can profit from it. He is the editor of several of Lombardi’s popular financial newsletters, including Payload Stocks and Pump & Dump Alert. Add Sasha Cekerevac to your Google+ circles