Amid a broad selloff in luxury goods stocks, a Morningstar analyst sees promise for the sector and reveals her top picks. “Valuations in the luxury sector have been quite high over the past few years,” Jelena Sokolova, senior equity analyst at Morningstar, told CNBC Pro. Amid the broad sell-off, she said, “there’s a lot of pressure on people who are willing to go through it.” For long-term investors in this cycle, opportunities will begin to emerge. “The decline in luxury goods stocks began in June, when industry leader LVMH reported lower-than-expected second-quarter sales. Shares of the world’s largest luxury goods group fell on concerns about a slowdown in the industry and weak consumer demand in China, triggering losses in other luxury goods stocks. The S&P Global Luxury Index is down about 12% from its recent March high, but has recovered some of its losses after plunging in late July and early August, and is up about 7.5% since August 12. Pinye… is moving sideways after years of strong growth. “Demand is no longer as strong, so stocks have sold off heavily. Companies are often quite expensive at multiple valuations, but they have historically delivered growth and have been quite profitable,” the stock analyst noted, referring to the past three decades. Luxury downcycles, they usually last one to two years. “So for investors like Morningstar looking for long-term opportunities, this is an interesting area to watch,” she added. Metrics Sokolova uses to evaluate whether to invest in a luxury stock include its history of pricing power, brand awareness and financial health. She also considers factors such as its investment value (or value generated on the secondary market) and control over the distribution of its products. ‘Very eye-catching’ High on Sokolova’s list is France’s Kering Group, which owns brands such as Gucci, Yves Saint Laurent and Alexander McQueen. Kering’s shares are listed on Euronext Paris and traded in the United States as American Depositary Receipts (ADRs). “I think Kering is really compelling at this point. It ranks third among luxury goods companies in terms of revenue,” Sokolova said. Her comments come as the company grapples with weakening momentum from Gucci, which accounts for nearly half of the group’s revenue and nearly two-thirds of operating profit. Sokolova remains optimistic about Gucci because it “is still a very well-known brand, has very strong pricing power and ranks second in leather products after LVMH.” She added: “I think it is unlikely that Kering’s share price will continue to underperform in the long term.” ‘Core Holdings’ Another stock that Sokolova likes as a “core holding” is Swiss company history Richemont, which owns brands such as Cartier, Montblanc and Chloé. The analyst said these brands serve a niche market of affluent consumers and thus benefit from “elastic demand” and they also have “ultra-high barriers to entry and are much less sensitive to fashion cycles.” “Despite the soft market, the stock is doing quite well right now,” she added. In July, Richemont said fourth-quarter sales were almost flat and reported “soft sales… in Asia Pacific.” Richemont’s shares are listed on the SIX Swiss Exchange and trade in the United States as American Depositary Receipts (ADRs).
