On Sunday evening, CBS’s 60 minutes devoted a piece of their program to eyewear company Luxottica Group (LUX). Luxottica Group was founded in 1961 in a small town in Italy and designs, manufactures and sells eyeglasses and sunglasses worldwide. Over the course of the segment, it became clear that LUX is not just your average eyewear company but rather a company that dominates the entire industry on a global basis. The interview started by focusing on the elevated prices that consumers pay for both prescription glasses and designer sunglasses. What many of these consumers don’t know is that just about every pair of glasses that they look at are likely being designed, made and sold to them by Luxxotica.
Do you like high end fashion lines like Prada, Versace, Dolce and Gabbana, or Chanel? Do you stretch your budget a bit each year to splurge on the newest sunglasses that come from the talented designers at these fashion houses? Well, the truth of the matter is that the sunglasses from all 4 of these companies are designed and made by Luxxotica.
Maybe you don’t follow the fashion trends from these designers but instead seek out smaller independent lines to separate yourself from the herd and instead opt to by sunglasses from small labels like Oliver Peoples. Well, I hate to break it to you but you’re buying Luxxotica glasses as well. Finally, for all of you out there that don’t buy into the whole “sunglasses for style” thing all together but choose to just support classic American brands like Ray Ban or Oakley? Do I even need to say it? Well, I will anyway, Luxxotica again.
So, why should we care? Luxxotica is a company that has proven itself as a talented designer and manufacturer of sunglasses and as a result all of the brands turn to them for their lines of glasses. That shouldn’t matter to us should it? Well, the problem with any monopoly is price control and reduced competition. Let’s start with price control. If there is one thing that can be said about all forms of glasses these days is that they are incredibly expensive regardless of the brand. Now, you may ask yourself, won’t the retail stores naturally put these glasses on sale at some point giving consumers a break on these elevated prices? Well, it just so happens that the retailers like Sunglass Hut, Pearle Vision, and LensCrafters also happen to be owned by Luxxotica. Starting to get interesting isn’t it?
Just to put the icing on the cake, I’m going to ask one more question for you. When it comes to sunglasses, we can all understand that they’re expensive but prescription eyeglasses? Wouldn’t the health insurers and vision plans take issue with escalated prices that have to be paid for eyeglasses these days? Not if those insurers are also owned by Luxxotica. That’s right Luxxotica is also in the insurance business as well. Check and mate.
If you have any question about the strength of Luxxotica’s position, you can just look the experience that Oakley had. A few years ago, Oakley voiced some discontent about continuing to work with Luxxotica for the design and manufacturing of its sunglasses. This happens in business all the time. In a normal competitive environment, Oakley could have just moved its business elsewhere. However, it was made pretty clear that if Oakley wanted to continue to be able to distribute its sunglasses through Sunglass Hut and other Luxxotica retailers, it better play ball. Eventually, Oakley gave in and became part of the Luxxotica portfolio.
At the end of the 60 minutes segment, the average viewer was probably left frustrated by the fact that both their tastes and spending were being controlled by one company when maybe they thought they had a little more control over their own decision making. But we don’t want to just be the average viewer. We want to act on this information. Monopolies normally do pretty well, until they’re broken up that is. But until then, let’s see if there is a way for us to profit off of the dominant position that LUX has managed to secure for itself.
By looking at the stock’s chart we can see that the market hasn’t had much issue with the company’s monopolistic position. Quite the contrary. The market has pushed the stock up close to 5 year and all time price highs.
From the chart above, we can see that the stock has reached valuations in the past of as high as $39/per share. We can also see some significance in the past to the $35 price level, which has acted as both a support and resistance level to the stock over the years. Most recently, it has been acting as a support level and is a level that we can use as an entry price for a buy as well as level to enter a sell stop loss below as a protective measure on a long trade.
If we see LUX pull back to the $35/level and bounce off of there (indicating continuing support), we can buy the stock at this level. Our sell stop loss can be entered around $34.30 to get us out of the position in case the $35 level fails and the stock is about to enter a downtrend. Our price target will be initially the 52 week high of $37.70 but hopefully a breakout to the all time highs and above. We can adjust our stop loss up as the trade works in our favor to guarantee some profits.
The other entry level we could consider is when the stock breaks up through its 52 week high of $37.71. We could consider a buy around $37.75 or just above $38 but I would play this trade with a smaller position being that the risk reward is different than if we were to buy it at the $35 level.
All in all, LUX deserves to be on our radar. It dominates every piece of a major industry that we are consumers of. The stock has been outperforming the broader market and is trading close to an all time high and possibly positioned for a breakout. If the market is going to take this stock to levels we’ve never seen, we’d like to be on board for that trade.
Who knows we might even be able to make enough money to buy a few pair of nice sunglasses?