Could FOSL Stock Keep Rising?
Companies like Fossil Group Inc (NYSE:FOSL) are rare commodities these days. Even though FOSL stock is a bet on consumer sentiment, it can skyrocket in the face of a slowing economy. How many other stocks can do that?
There is little to no hope of a global bull market this year. Economic headwinds are multiplying by the second, driving fear and panic into stocks. However, there are a handful of sectors that are less affected than others.
One of them is the market for luxury goods. The companies that sell these goods aren’t bothered by high unemployment, particularly when it’s at the lower end of the wage scale. Their demand comes from white-collar professionals.
Selling high-end watches, purses, and accessories is a recession-proof business. That may not be universally true, but it’s an article of faith in the United States. We have a stunning amount of wealth in this country and it doesn’t change hands all that often. (Source: “Economy is in Crisis, Yet Luxury Brands, Tiffany’s, LVHM Still Report Sales Growth,” Forbes, August 5, 2011.)
The Untapped Potential for Fossil
Studies show that rich people tend to stay rich. (Source: “America Is Even Less Socially Mobile Than Most Economists Thought,” The Atlantic, July 23, 2015.) They keep their lifestyle constant regardless of what’s happening in the broader economy, which is what makes luxury brands such a profitable investment. The only difficulty is picking which brand.
Fashion is a notoriously volatile industry. There is simply no way to forecast how much people will like a design. We can never guess which brand will resonate with New York yuppies or California hipsters. There’s too much chance in that equation.
Incidentally, the randomness of fashion trends is why I like Fossil stock so much. The company has its own brand, but it also makes products for other designer brands. I’m talking about huge names like Burberry, Emporio Armani, and Michael Kors.
As a result, the company’s risk is diversified. If one of its customers suddenly fell out of fashion, it wouldn’t be the end of the world. They could simply cut that product line.
But there is one tough obstacle that Fossil has yet to face. In an age where smartphones also tell time, fewer people want watches. The company has managed to avoid that reality until now, because its customers think of watches as a fashion accessory. However, sooner or later, they will have to reinvigorate demand.
Fossil’s senior executives seem to be thinking along similar lines. They made an early move into the wearable technology space, offering customers a smartwatch that’s also designed with style. It could help bring customers onto a smartphone-like product cycle.
“The way we look at the watch business in the channel globally is that the watch business is relatively soft,” Fossil CEO Kosta Kartsotis said. “So our mission is to put technology across the platform, and all of our customers are very interested in this.” (Source: “Edited Transcript of FOSL earning conference call or presentation 16-Feb-16 9:30pm GMT,” Yahoo! Finance, February 16, 2016.)
If Fossil manages to pull off this transition, we could see the stock climb to new heights. Its share price already jumped 31.1% after crushing analyst estimates by $65.0 million.
Now imagine those same wealthy customers hooked to a product lifecycle where new smartwatches debut every one to two years. As the technology improves, customers keep upgrading. That vision could easily start becoming reality in the next year.
Regular wearable technology companies could be hurt by an economic slowdown, but let’s remember that Fossil is fairly insulated from those risks. By combining its unique luxury appeal with cutting-edge technology, Fossil could see its stock land between $65.00 and $75.00 per share by the end of 2016.