9 Rich-Kid Stocks Bucking the Terrible Economy
Most of the world's wealthiest people have no conception that the rest of us have been living in a gut-wrenching recession for the past three years.
Just look at their profligate spending: $400 for skin-tight, ripped blue jeans; $68 for a rubber mat to perform the ascetic practice of yoga; $9,000 for diamond earrings that look like chandeliers; and $100,000-plus for a car when the average American home sells for $260,000.
Investors have taken note of this as shares of many luxury-goods purveyors are up by double-digits over the past three months.
For example, the leisure-goods sector, as tracked by Morningstar, has risen 16.7 percent over the past three months and an annual average of 45 percent over the past three years, so the latest rally could be sustainable.
So why fight it? Consider it an investment opportunity and buy stocks that have benefited from what is a consistently strong trend: wealthy people, especially the noveau riche, paying up for name-brand goods.
A key factor for most of the luxury-goods sellers, and what bodes well for their futures, is that demand for brand-name, and what some call "aspirational" goods that suggest wealth, is booming in emerging market countries such as Brazil, Russia, India and China, in particular.
Here are nine stocks that are benefiting from demand for their expensive products or services:
Company profile: Wyndham is the world's largest operator of time shares, rentals and luxury hotels.
Share performance: up 31 percent in the past three months; 28 percent in 2011; three-year average annual return of 68 percent.
Investor takeaway: Morningstar found a unanimous eight "buy" ratings for its shares in a survey of analysts. The company has been taking care of shareholders as it set aside $600 million for share buybacks in 2011 and has the potential to reduce total shares outstanding by more than 15 percent over the next several years. It has also increased dividends per share more than three-fold since 2008," Morningstar said.
Company profile: Lululemon is a specialty retailer of upscale women's athletic apparel. Its original focus was on yoga clothing but it has expanded its offerings to include a wide range of sports as well as comfort wear. The company has a $6 billion market value. Most sales are through its 140 company-operated retail stores. Customers are willing to pay up to $150 for a jogging skirt and $68 for a yoga mat.
Stock performance: up 7.7 percent in the past month; 36 percent in 2011; three-year average annual return of 133 percent.
Investor takeaway: Goldman Sachs added Lululemon to its "conviction buy" list Jan. 4, with a $64, six-month price target (then a 37 percent upside). The bank said: "We believe LULU still offers one of the most compelling growth stories in retail, with continuing brand, sector-leading annual sales, growth of over 30 percent, and substantial runway still ahead."
But there's no doubt that its success will attract competitors, and the formidable Nike is making a move on the sector.
From a totally different angle on its appeal, Morningstar says Lululemon "could attract interest from strategic buyers or private equity firms at the right price, given that the retailer has no debt, attractive growth prospects, and a strong free cash flow position."
Company profile: Coach makes high-quality, brand-name goods, including handbags, leather accessories, business cases, footwear, jewelry, sunwear, travel bags, watches and fragrance products. It's seeing huge sales growth in China and Japan. Handbags sell for up to $420.
Share performance: up 16.6 percent in the past three months; 12 percent in 2011; three-year average annual return of 43 percent.
Investor takeaway: Morningstar analyst Paul Swinand wrote that, "even during the challenges of the recession , Coach's fundamentals were excellent, with three-year historical operating margins above 30 percent and returns on capital around 40 percent."
Free cash flow generation also has been high, historically greater than 20 percent of revenue. S&P Capital IQ has it rated "strong buy" with five stars, its highest rating. It gives its shares a $77 price target, a 23 percent premium.
Whole Foods Market
Company profile: Whole Foods is the largest U.S. retailer of natural and organic foods and has about 300 stores, including ones in Canada and England. In addition to groceries, it sells environmentally safe household items; meat, poultry, and seafood free of growth hormones and antibiotics. It is sometimes derisively referred to as "whole paycheck" for its relatively high-priced goods.
Share performance: up 11.6 percent in the past three months; it gained 38 percent in 2011; three-year average annual return of 93 percent.
Investor takeaway: The company resonates with people who can afford to pay for what they perceive to be goods that represent health and wellness.
S&P Capital IQ has Whole Foods rated "buy." Morningstar analysts write that "Whole Foods generated over $800 in sales per square foot in fiscal 2010, significantly higher than that of the average supermarket," and note that it has no debt and the ability to fund new-store growth without borrowing.
Company profile: Daimler has some of the top luxury car brands in the world including Mercedes-Benz and Maybach (which it's phasing out). It also owns stakes in a wide range of other automakers.
Share performance: up 8.7 percent in the past three months; down 30 percent in 2011; three-year average annual return of 11.3 percent.
Investor takeaway: S&P has it rated "hold." But Morningstar says the company's "brand equity, combined with cost-cutting initiatives, gives it the ability to report strong profits as vehicle demand normalizes. Daimler's luxury brands are some of the most valuable in the world and give the company some protection against the cyclical downturns of auto sales."
And luxury-car sales are also on the rise. On Thursday, Daimler said its Mercedes-Benz cars division's global sales hit a record 1.36 million, a rise of 7.7 percent year-over-year. In the U.S., 2011 sales rose 13 percent, and German luxury-car rival BMW had similar gains. In particular, it's seeing booming sales in Russia, Brazil, India and China.
Capital Research and Management (American Funds) owns almost 4 percent of its shares, more than double that of the next largest shareholder. The German company doesn't have significant U.S. analyst coverage.
Company profile: The Tiffany brand goes on fine jewelry it designs and makes as well as china, fashion accessories, timepieces, fragrances and gift items sold at its retail stores. Expect to pay $9,000 for a pair of "Tiffany Legacy" diamond chandelier earrings.
Share performance: up 7 percent over the past three months; up 8.2 percent in 2011; three-year average annual return of 39 percent.
Investor takeaway: S&P rates Tiffany "strong buy" with five stars, its highest rating with a $90 price target, a 36 percent premium. S&P says it has tremendous worldwide growth opportunities, especially in emerging market countries such as China.
"Assuming share buybacks under the company's $400 million repurchase authorization, we see earnings per share of $3.80 in fiscal 2012 and $4.20 per share in fiscal 2013," S&P said.
Morningstar analyst Paul Swinand writes that "exposure to the steady (wedding) engagement market makes Tiffany a stock to buy on short-term dips, such as the Japan crisis or a Europe blowup, and its long-term brand and strong balance sheet make it attractive when the market mood is dark."
Ruth's Hospitality Group
Company profile: Ruth's Hospitality Group is the owner, operator and franchiser of upscale steakhouses, primarily under the Ruth's Chris name. It has about 130 restaurants worldwide, about half of which are company-owned. Morningstar says the average check is $75. It's definitely a small-cap stock at a $190 million market value.
Share performance: up 28 percent in the past three months; up 8 percent in 2011; three-year average annual return of 46 percent.
Investor takeaway: Fidelity owns 14 percent of its shares, double that of the next highest investor. S&P, which doesn't rate it, said Wall Street analysts give it three "buy" ratings, one "buy/hold" and three "holds."
Company profile: True Religion Brand Jeans is an apparel company that specializes in premium denims, with prices of up to $398 for one pair of girls skin-tight "distressed" jeans. Other products include: corduroy pants, skirts, shirts, shorts, jackets, blazers, hoodies and T-shirts.
Share performance: up 22 percent in the past three months and 55 percent in 2011; three-year average annual return of 38 percent.
Investor takeaway: Morningstar's review of analysts' ratings found three "buys," one "outperform," one "hold" and one "underperform." Columbia Wanger Asset Management owns 9 percent of its shares. They have an $894 million market value.
Company profile: Brunswick makes a wide range of recreational products, including Sea Ray, Boston Whaler and Bayliner boats, Mercury and Mariner outboard engines; fitness equipment, under the Life Fitness and Hammer Strength brands; and billiards and bowling equipment.
Share performance: up 22 percent in the past three months; down 3.4 percent in 2011; three-year average annual return of 54 percent.
Investor takeaway: The recession hurt boating industry sales across the board, but Brunswick stayed afloat, which means it can gain market share as competitors sink into oblivion. But the industry may never return to the glory days of 2007 to 2008.
Mutual fund firms appear to like it as Wellington Management owns 11.7 percent and Fidelity 10 percent of the company's outstanding shares. A Morningstar survey of analysts found five "buy" ratings, one "outperform" and three "holds."
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