Mainland tourists wait in line outside a luxury goods store at a shopping precinct in the Tsim Sha Tsui district of Hong Kong on May 11.ISAAC LAWRENCE/AFP/Getty Images
Who wants pricey stocks? Me. You should too – particularly luxury goods companies, especially the priciest. Value vultures may cringe, but let me explain why now is not the time to bargain shop.
Lately and ironically, luxury goods stocks haven’t been so luxurious. Through June 19, they are down 8.4 per cent from April 24′s high, even after ticking higher in June. Meanwhile, global stocks are up. That has many fearing that luxury’s leadership since the bear market low last fall is over, as U.S. and Chinese demand wanes amid nosebleed industry valuations, causing a superslump.
Don’t believe that. The recent weakness is one big buying opportunity. Yes, large luxury goods stocks, along with big-cap tech, have irregularly led the market up in this new bull market. These aren’t exactly the big-ticket cars, boats and planes the new luxury goods tax targets. Rather, the industry mostly focuses on smaller, big-name, trendy fashion brands that are no longer merely the domain of the ultrarich. Like tech, they offer high-assurance growth – rare in this slow-growth global economy. Markets put a premium on all-weather growth when economic growth is low and questionable. No surprise, then, that luxury isn’t cheap.
May’s dip did little to dent luxury goods’ allure. The industry is still up 16.2 per cent in 2023 – and 43 per cent since the global low, whupping world stocks’ 23 per cent. While Canada lacks them, the U.S. offers some exposure. Europe is the real hotbed, though, with almost three-quarters of the world’s luxury goods market cap. And those stocks have soared this year. France’s are up 25.7 per cent. Italy’s, 36 per cent. Switzerland’s jumped 21 per cent.
Why? Categories hit hardest in bear markets typically bounce highest early in new bull markets. It is an almost ironclad market rule – as my December column explained in saying that luxury and big tech would lead 2023′s recovery. During 2022′s slide, world stocks fell 21.6 per cent. Global luxury goods? Down 34 per cent. The bigger drop fuelled more fear, lowering expectations – and priming 2023′s rebound.
Doubters argue that May’s drop, compounded by still-high valuations, portend luxury’s hot streak fizzling. Or they claim cheaper stocks are safer. Both wrong! Yes, the industry’s price-to-earnings ratio using projected 12-month earnings averages 24.5 – quite rich next to world stocks’ 16.9 and Canadian stocks’ 12.9. But don’t fall prey to acrophobia. Low P/Es feel good, as if you can’t fall far with them (you can if earnings fall on an absolute or relative basis!). But low P/Es don’t foretell outsized returns after bear markets.
P/Es often mislead, particularly early in upturns – like now. Stocks look forward while earnings look backward. Hence the “P” in P/E ratios climbs fast off lows as markets foresee brighter times. But earnings forecasts – let alone actual earnings – lag amid post-bear-market dourness. This inflates luxury goods’ P/Es now.
Consider 2020′s growth-led rebound. In the two months after Canadian stocks’ March low, their forward P/E jumped from 13.3 to 18.3. Yet they gained 52.7 per cent more in the next 22 months! Global luxury goods’ forward P/E rose from a relatively high 21.2 at the 2020 bear market’s end to a nosebleed 37.4 in six months. Yet luxury stocks soared 42 per cent through December of 2021′s top.
Investors’ low-P/E fixation offers another edge with luxury goods stocks – if you realize a crucial reality: When growth stocks lead during a sluggish economy, higher-P/E stocks routinely lead within high-growth categories. Folks seeking growth then don’t want lower-quality, riskier growth. They want the most likely growth, not the possibility of the highest growth. So the highest-quality firms command loftier valuations. It is the same reason lower-quality, small-cap tech stocks now lag big-cap tech.
And times are good for global luxury goods. You have witnessed the industry’s big spread beyond Bloor Street, starting way back when beloved global brands inundated Yorkdale more than a decade ago and continuing with luxury-laden zones such as Vancouver’s Alberni Street. No slowdown is in sight – another six huge luxury names just signed on to help anchor Montreal’s Royalmount megamall when it opens in 2024.
Heated inflation hasn’t dented luxury’s robust gross operating profit margins, which have remained above 55 per cent since 2021. Meanwhile, big European firms have racked up strong sales increases in China since its reopening – despite fears of a stalling Chinese recovery. The broader Asia-Pacific region offers huge growth further out as the middle class expands. It now tops the Americas in luxury goods industry revenue share at 37 per cent. Big global brands are penetrating India and the Middle East, too.
So don’t fear these pricey stocks. Follow luxury’s leaders. Use this dip as a buying opportunity before their next run up. Think French, German, Italian and Swiss. Don’t get cheap. Pay up for the highest-quality stocks and watch the leaders lead.
Ken Fisher is the founder, executive chairman and co-chief investment officer of Fisher Investments.
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