Roughly a year ago, rocked by plunging stock portfolios, the prospect of widespread layoffs on Wall Street and the shock of the Bernie Madoff hedge fund scandal, the rich abruptly went into hibernation.
Lavish holiday parties got canceled or scaled back, designer gowns languished in closets, jewelry stayed in bank vaults, and empty storefronts multiplied in Palm Beach. There was talk of a permanent shift away from conspicuous, frivolous consumption and toward a newfound appreciation for the timeless virtues of friends, family and home cooking.
That was then.
Last week I heard from someone who had sold her $3.5 million one-bedroom Manhattan apartment after it had languished for 18 months without a bid. On Nov. 4, an art auction at Sotheby's (BID, news, msgs) brought in $182 million, well above estimates. Nov. 5 brought news that retail sales at high-end Nordstrom (JWN, news, msgs) and Saks (SKS, news, msgs) had risen in October for the first time since May and June 2008, respectively.
Like the swallows flocking back to Capistrano, the rich have returned.
The unemployment rate may still be rising, but many of these people don't work anyway, living as they do on interest and dividends. What matters to them isn't unemployment at 10% but the Dow Jones Industrial Average ($INDU) at 10,000.
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Love 'em or hate 'em, but profit from them
You don't have to be rich or even admire the wealthy to make money off them. Quite a few companies that cater to the wealthy trade publicly, and several, including Merrill Lynch and BNP Paribas (BNPQF, news, msgs), have put together luxury stock portfolios.BNP's version, the World Luxury Index, includes 20 luxury purveyors and trades on Deutsche Boerse. At a recent 72 euros (about $107), it hit a 52-week high Oct. 12 after trading as low as 39 euros (about $58) in March.
As trading in the index suggests, investors have been betting on a luxury comeback for months, and the best time to buy luxury (along with everything else) would have been earlier this year. But the index is still far from its all-time high of more than 105 euros, reached in 2007, suggesting further gains are in store.
The recent rise certainly hasn't been supported by earnings, which are still depressed. Even while celebrating the results of last week's auction, Sotheby's reported a third-quarter loss of $57.8 million on a 41% revenue drop.
That should change as wealthy buyers open their wallets and sellers show a renewed willingness to part with masterpieces rather than the mostly lackluster works they've consigned during the recession. And, more generally, having slashed costs and inventory to survive the worst of the downturn, purveyors of luxury goods should be poised to gain.
A 1-stock portfolio
In January 2008, I recommended (and bought) French luxury conglomerate LVMH Moët Hennessy/Louis Vuitton (LVMHF, news, msgs). As I said then, "Here's the thing about American consumers, and especially the rich ones: Sooner or later, they always come back."The reasoning was sound, but it turned out to be nearly two years premature. Back then I had no idea the recession would be so severe or the stock market slump so deep.
LVMH shares kept dropping, eventually trading at less than half of what I paid. But this year they've rebounded strongly, and I'm now showing a slight gain.
I still recommend LVMH as a one-stop luxury stock. It's practically a diversified luxury index in itself, with operations in high-end fashion (Louis Vuitton, Givenchy, Donna Karan), champagne (Dom Perignon), perfume (Dior) and jewelry (the De Beers retail brand, under a venture with the diamond giant).
I bought my shares in their French listing, but they've since been listed over the counter as American depositary receipts.
I've also put together my own "common-sense" index of luxury stocks. In my opinion, the others aren't exclusive enough. The BNP Paribas index requires only that companies derive at least 50% of their revenue from luxury products. My index includes just seven stocks in addition to LVMH: Christian Dior (CHDRF, news, msgs) and Hermes (HESAF, news, msgs), fashion; Richemont (RHMSF, news, msgs), watches; Porsche (POAHY, news, msgs), autos; Bulgari (BULIF, news, msgs) and Tiffany (TIF, news, msgs), jewelry; and Sotheby's, fine-art auctioneers.
An advantage for investors looking for geographic diversification is the extent to which European companies dominate the list -- suggesting that when it comes to luxury, the Europeans still have cachet.
The nearly luxurious
Investors might also want to consider companies in what I call my near-luxury index: Saks and Nordstrom; Burberry (BURBY, news, msgs), Polo Ralph Lauren (RL, news, msgs) and Coach (COH, news, msgs), fashion; Toll Brothers (TOL, news, msgs), housing; and Starwood Hotels & Resorts Worldwide (HOT, news, msgs).This is an upper-middle-class niche where Americans seem to excel. Even a British icon like Burberry is run by an American.
Video: Ultra-high-end retail at a discount
Most of these stocks are near their highs for the year, as are the major indexes, and therefore I don't consider this an auspicious time to increase stock holdings. But there's nothing wrong with adjusting your portfolio if you believe, as I do, that the luxury segment is poised for further gains as the recovery strengthens.
One strategy would be to sell defensive consumer positions such as Wal-Mart Stores (WMT, news, msgs) or even Amazon.com (AMZN, news, msgs) and buy more high-end consumer-discretionary stocks. Or you can add these to your list for when the inevitable correction arrives.Enjoy the shopping. Unlike a new designer dress or luxury car, luxury stocks shouldn't depreciate the instant you buy them.
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No wonder this country is going to hell.