Jewelry, and specifically diamond, sales were falling for a while. Millennials were pushing off marriage and placing higher value on experiences over things. Plus, many of them were just too busy paying off student debt to worry about buying jewelry. But jewelry sales are rebounding now, and so is Tiffany & Co. (NYSE:TIF) stock. After a rough 2-year stretch, TIF stock has surged 30% higher this year.

The catalyst, of course, is rebounding jewelry sales. Comparable sales at TIF have been in free fall for multiple quarters. But those declines have moderated. Last quarter, comps hugged the flat line.

Meanwhile, gross margins are stable and operating margins are improving thanks to expense leverage. Overall, the composite earnings growth outlook for TIF looks about as good as it has over the past several years.

But Tiffany stock is also as richly valued as it has been over the past several years. TIF’s dividend yield, meanwhile, is as low as it has been over the past year.

So is this a strengthening growth story with a growing valuation or a stock with an over-stretched valuation?

I think the latter. Here’s why…

Tiffany Is a Solid Company

There is no argument that Tiffany will be around for a while.

The company sells goods with secular demand. While that demand might fluctuate from year to year, the overall trend for jewelry sales is up, due to inflation and persistently high demand.

But secular demand doesn’t imply strong revenue growth. In fact, TIF’s revenue growth over the next several years is expected to be quite modest.

Consider this: before TIF’s sales started falling in 2015, the company grew sales at a 5% annual rate from 2011 to 2014. In other words, when times were good, sales were still only growing at 5% per year.

With comparable sales growth trending upward, it looks like we are about to enter an era similar to the 2011-14 one. That implies sales growth of 5% per year over the next several years, driven by low-single-digit comparable sales growth and low-single-digit square footage growth.

On the margin side, the business doesn’t really have any sustainable gross margin drivers. Sometimes, a sales shift towards higher-end jewelry will prove additive to margins, but that isn’t a sustainable driver. Consequently, the most reasonable outlook for gross margins over the next several years is flat.

Solid revenue growth should drive some expense leveraging, which will lead to slight operating margin expansion. That, plus some share buybacks, should drive somewhere between 5% and 10% earnings growth. The Street is looking at roughly 7.5%. I agree with this mark.

TIF Stock Is Overvalued

The problem here is that TIF stock is trading at 25.3 times this year’s earnings estimate for that pedestrian 7.5% growth.

That doesn’t make much sense.

The S&P 500 is trading at a significantly lower multiple (~20) for bigger growth prospects (~10.5%).

Moreover, TIF stock has historically maxed out around 26-27x trailing normalized earnings. Today, TIF stock’s trailing earnings multiple is 27, right near where the valuation has historically topped out.

Put this all together and its easy to see that TIF stock look unnecessarily risky at these levels.

Granted, the whole market is being bid up right now on tax reform hopes, but that still doesn’t explain the huge disparity in growth-adjusted valuation between the S&P 500 and Tiffany stock. TIF’s average effective tax rate of 34% isn’t too far off from the S&P 500’s average effective tax rate of 30%.

Bottom Line on TIF Stock

Tiffany stock has rebounded strongly in 2017 after a 2-year down stretch.

But that run appears to be nearing an end thanks to an over-stretched valuation.

TIF stock may continue to grind higher as tax reform hopes build, but I think there are better and less risky ways to play the potential tax reform tailwind.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.