'One of the cheapest stocks': Bank of America just upgraded these 3 luxury names in Europe

Published Mon, Sep 25 20238:20 PM EDTUpdated Tue, Sep 26 20231:37 AM EDT

Bank of America upgraded three luxury stocks that are bucking the negative trends afflicting the broader sector in Europe. The MSCI Europe luxury index has fallen 16% from its most recent high on Apr. 24 as evidence emerges of slowing demand in the third quarter. The investment bank expects profit margins to decline by one percentage point for the sector even as third-quarter revenue is seen growing modestly. Bank of America made seven rating changes in the sector. It downgraded Richemont and Prada to neutral and lowered Kering and Tod 's to underperform. Meanwhile, the investment bank upgraded Ermenegildo Zegna and Pandora to buy, and Hugo Boss to neutral from underperform. Bank of America believes wealthy consumers in the United States have been "the canary in the coal mine" since their spending on luxury goods peaked in early 2022. The U.S. luxury goods sector has since normalized to pre-pandemic demand levels over the past six quarters. The investment bank believes a similar pattern will likely emerge in Europe with spending on the continent peaking early this year. "Pullbacks in the sector are normally an attractive buying opportunity. This time will probably be no different," said BofA analyst Ashley Wallace in a note to clients on Sept. 25. However, Wallace also cautioned investors to wait before buying the dip. "The sector is cheap, however in the absence of positive China macro/stimulus it's unclear what will drive a re-rating in the near term," she added. Pandora Wallace lifted her price target to 900 Danish krone ($128) from 720 krone, giving the stock 27% upside potential over the next 12 months. Despite Pandora shares' 45% rally this year, the Bank of America analyst still considers it "one of the cheapest stocks in all of Consumer Discretionary." "We believe the valuation fails to reflect Pandora's equity story which continues to gain momentum, driven by new collection launches, accessible price point, and retail excellence," the analyst said. 0NQC-GB YTD line Zegna Bank of America upgraded its rating for the Italian luxury brand's U.S.-listed stock to buy from neutral with a price target of $16.50, which points toward 20% upside potential. The investment bank said Zegna's recent share price decline presents an "attractive opportunity" given its secular growth outlook in high-end menswear and solid brand turnaround execution. "We continue to see the secular growth in high-end menswear and we like the solid execution around the brand turnaround at Zegna which was crucial for us to understand to turn more positive," the analysts added. ZGN 1Y line