I never like to sell stocks when there is fear in the streets as there is today. The market plunge Thursday increased the fear in the market to apocalyptic levels. For the most part, I would be a buyer in this environment.
Some really good stocks with quality earnings like Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and others trade for very reasonable prices.
Corporate earnings are strong and growing. Guidance for the future is positive. Companies are buying back stock and paying huge dividends. Despite the agreement to lower spending in return for a debt ceiling increase, government dollars continue to flow into the economy. More is likely on the way.
The same is true with the Federal Reserve. The effects of QE2 have yet to fully hit the economy. Given the potential for a double-dip recession, the odds for QE3 have increased greatly.
The outlook might not be rosy, but it is not as gloomy as the market is currently projecting. I fully expect a strong rebound in stocks before the end of the year. That said, there is one category of stocks that I am bearish on at the moment: the luxury category, which has enjoyed a run that, frankly, has defied gravity.
At a time when most budgets are constrained, spending on luxury goods has continued to grow. So too have the profits for many companies selling luxury goods. As the profits have grown, stocks of luxury companies have been strong performers in this market.
What I find odd about the whole luxury sector is subtle. During the last economic expansion, the story on luxury stocks was that these companies were pushing their goods downstream. The ability to increase sales by selling to the middle class was the investment thesis for buying luxury stocks. Now, with the middle class evaporating before our eyes, the story has changed.
The investment thesis today is that the rich are nonplussed by the economic events around the globe. The wealthy class is expanding, and it continues to spend. Perhaps the rich are spending even more. Luxury stocks then will be insulated from any recessionary pressures in the market.
I don’t like it when stories change. A shift in investment thesis is altogether too convenient. Given that it is Wall Street that promotes these investment stories, I am even more skeptical. You simply cannot have it both ways with luxury stocks.
While I would have preferred selling these stocks before the collapse, there is more room for them to fall. Wall Street may defend these names, claiming that they can avoid the double dip, but I would not buy that line. The growth story for luxury required a strong middle class and we are far and falling further away from having that.
Here are three luxury stocks to sell now:
Coach
Is there anything more unnecessary from a consumer perspective than a luxury handbag and other leather accessories? When times are tough, these will be the first items to be cut from discretionary spending. Coach (NYSE:COH) sells wants and desires, not needs.
Up until its most recent earnings report, Coach was a high flyer in the market. Even after the market collapse, the stock is up 2% this year. Shares of Coach fell about 6% after the company reported results for its fiscal fourth quarter ending June 30 that beat Wall Street estimates by 3 cents per share. That was not good enough considering Coach’s premium market valuation.
After the sell-off, Coach still is expensive. Shares trade for 19 times trailing earnings that are expected to grow by 15% next year. As it is likely that estimates for the company are too high given the likelihood of a double-dip recession, Coach is an easy stock to sell today.
Tiffany & Co.
Everyone loves the little blue box, but do we really need it? I bought Tiffany & Co. (NYSE:TIF) jewelry for my wife a decade ago, when times were significantly better. I’m not sure I would buy one today. Paying a premium for a brand doesn’t make sense. When times are tough, jewelry sales typically lag.
Tiffany has transitioned from the company extending its reach to the middle class to being the jewelry choice of the rich. The stock is one of the best performers in the market and is up nearly 10% this year, including the recent sell-off. That is a remarkable return for a market that is quite limited by the collapse of the middle class.
For the current fiscal year ending Jan. 31, 2012, the average Wall Street estimate for profits at Tiffany is $3.57. That number increases by 15% to $4.11 in the following year. That is impressive growth, no doubt, but investors have to pay a premium of 19 times current-year estimates to buy the stock. In the short term, all might seem rosy with Tiffany, but I would avoid this stock. You can only defy gravity so long. When economic realities set in, performance at Tiffany will be negatively impacted.
Winnebago
Already in free fall, investors can expect more bad news from Winnebago (NYSE:WGO) in the coming quarters. There is simply no money out there available for consumers to buy these big luxury motor homes. Add in the double whammy of high oil prices, and you have the recipe for disaster.
Shares of Winnebago already reflect the doom and gloom. The stock is down a whopping 53% in 2011, with much of that loss coming after the company reported disappointing results for the quarter ending May 31. In that period, the company made a smallish profit of 4 cents per share. That missed the Wall Street consensus estimate of 13 cents per share.
Winnebago shares plummeted about 30% on the day after that disappointing report. Investors can expect more disappointment, as estimates for the company are likely too high. With the stock trading for 21 times estimated earnings for the current fiscal year ending Aug. 30, there is more risk with this stock than I would be comfortable with. If we truly have a double-dip recession, Winnebago becomes a penny stock trading for less than $5 per share.
