Should You Indulge in Luxury Stocks Now?

At the end of August, I wrote about the diverging fortunes of the "Two
Americas" and used the relative performance of high-end jeweler Tiffany & Co
(NYSE: TIF ) and the everyman store Wal-Mart (NYSE: WMT ). Click to Enlarge
While Tiffany had been enjoying massive sales and profits gains and this
despite rising costs for the company's gold and diamond inputs Wal-Mart had
posted nine consecutive quarters of declining domestic sales. Wal-Mart's core
demographic middle- and working-class Americans were suffering, while the
global wealthy were doing just fine. I was not bearish on Wal-Mart (after all,
if any retailer can survive a rough economy, it would be the colossus from
Bentonville, Ark.), but I recommended investors carve out room in their
portfolios for an allocation to the luxury goods sector. In addition to Tiffany,
I offered Coach (NYSE: COH ) and LVMH Moet Hennessy Louis Vuitton (PINK: LVMUY )
as suggestions. Alas, investors would have been better off just buying Wal-Mart.
As you can see in the chart, WMT has been the best-performing stock of the
group. My, what a difference three months can make. Wal-Mart finally broke its
chain of declining quarters when it announced earnings earlier this month, and
Tiffany issued a disappointing outlook on Tuesday that sent its shares down more
than 11% intraday. The entire luxury sector fell in sympathy on fears that the
euro zone crisis would sap demand for expensive baubles and trinkets. So are
investors right to be concerned? Has Europe killed the bull market in bling? If
Tiffany's earnings release is any indication, the answer is an emphatic
"no." Sales were up 21% and earnings per share climbed a whopping 63% for
the quarter ended Oct. 31. Sales in the Americas were up 17%, and importantly
sales in Asia were up 44% on strong demand from China. Even in Europe, the
epicenter of the crisis, same-store sales were up a respectable 6% after
adjusting for currency moves. Tiffany CEO Patrick McGuiness said in the
conference call that fourth-quarter sales were "meeting expectations" but
that he was "certainly not implying that Tiffany will be completely
insulated" from the economic shockwaves emanating from Europe. Analysts had
expected fourth-quarter earnings of $1.63 per share, but McGuiness indicated
earnings likely would be five cents lower at $1.58. It's hard to look at these
numbers and see justification for an 11% correction, but such is life in
marketland. Markets are forward looking, and when too much optimism is baked
into the stock price, disappointments like these happen. On the flip side, when
too much pessimism is baked into prices, even trivially good news can send a
stock's price soaring. Consider Research In Motion 's (NASDAQ: RIMM )
announcement Tuesday that it would open its corporate networks to iPhones and
Android phones. RIMM shot up by more than 8% before backing off slightly.