Are Luxury Stocks Really A ‘Defensive Play’?

Are Luxury Stocks Really A ‘Defensive Play’?

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Luxury stocks have been known to outperform when economic times are bad. How could that work?

It seems pretty counter-intuitive. Luxury goods are the ones that we imagine would be more expensive. So wouldn't they be the first thing to go when families tighten their budgets during harder times? 

Well, not exactly.

It often works in the opposite way. As Bloomberg columnist Gary Shilling explains, consumers are always going to try and get the best things they can afford. And when they have less cash, they tend to buy fewer, but more expensive goods. Luxury companies are by their very nature high-margin, low volume businesses. 

No one is going to buy 40 Coach (COH) handbags in their whole life, much less a single year. So an economic climate where consumers are all buying fewer, better goods is precisely what these firms like to see. 

If you're bearish on 2014, or hesitant about whether the stock market can continue its upward trend without a more tangible recession, you may be looking to add some defensive plays to your portfolio. So we decided to look for some luxury stocks that might be worth investigating.

To do that, we decided to look for stocks with encouraging inventory turnover trends. These happen when a company sells off more of its product than it expected to, leading inventory to decline as a percentage of net assets. This often indicates growing efficiency and increased demand for the goods which the company is selling.

Starting with a list of 30 S&P 500 stocks that sell luxury goods, we were left with 4 companies on our list. 

Click on the interactive chart to view data over time.

1.Carnival Corporation (CCL, Earnings, Analysts, Financials):Operates as a cruise and vacation company. Market cap at $30.61B, most recent closing price at $39.09.

Revenue grew by 2.21% during the most recent quarter ($3,658M vs. $3,579M y/y).

Inventory grew by -4.1% during the same time period ($374M vs. $390M y/y).

Inventory, as a percentage of current assets, decreased from 21.42% to 19.31% during the most recent quarter (comparing 3 months ending 2013-11-30 to 3 months ending 2012-11-30).
 

 

2.Deckers Outdoor Corp. (DECK, Earnings, Analysts, Financials):Engages in the design, production, marketing, and brand management of footwear and accessories for outdoor activities and everyday casual lifestyle use. Market cap at $2.63B, most recent closing price at $76.78.

Revenue grew by 19.24% during the most recent quarter ($736.05M vs. $617.26M y/y).

Inventory grew by -13.12% during the same time period ($260.79M vs. $300.17M y/y).

Inventory, as a percentage of current assets, decreased from 43.4% to 31.45% during the most recent quarter (comparing 3 months ending 2013-12-31 to 3 months ending 2012-12-31).
 

 

3.Blue Nile Inc. (NILE, Earnings, Analysts, Financials):Operates as an online retailer of diamonds and fine jewelry worldwide. Market cap at $466.3M, most recent closing price at $36.55.

Revenue grew by 7.23% during the most recent quarter ($145.96M vs. $136.12M y/y).

Inventory grew by 3.79% during the same time period ($34.53M vs. $33.27M y/y).

Inventory, as a percentage of current assets, decreased from 26.42% to 22.05% during the most recent quarter (comparing 13 weeks ending 2013-12-29 to 13 weeks ending 2012-12-30).
 

 

4.Tesla Motors, Inc. (TSLA, Earnings, Analysts, Financials):Designs, develops, manufactures, and sells electric vehicles and advanced electric vehicle powertrain components. Market cap at $30.24B, most recent closing price at $238.13.

Revenue grew by 100.84% during the most recent quarter ($615.22M vs. $306.33M y/y).

Inventory grew by 26.76% during the same time period ($340.36M vs. $268.5M y/y).

Inventory, as a percentage of current assets, decreased from 51.17% to 26.89% during the most recent quarter (comparing 3 months ending 2013-12-31 to 3 months ending 2012-12-31). 
 

(List compiled by James Dennin. Analyst ratings sourced from Zacks Investment Research, inventory turnover data sourced from Google Finance. All other data sourced from Finviz.)

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