Making Money Off The Rich




Making Money Off The Rich - From the canyons of Manhattan to Beverly Hills, Calif., debate is again raging over the rich. Should we soak them by raising their taxes? Coddle them by extending their tax cuts? And who really is rich, anyway?

The debate is likely to continue beyond the midterm elections. Rather than get all worked up over it, I have a simple proposition: Why not sidestep the political issues and make some money off of them?

It is a strategy that can work for virtually any income bracket, considering that one share of Tiffany (about $47) costs less than even the cheapest silver key ring at the luxury chain's flagship Fifth Avenue store.

There are other factors favoring companies that cater to the wealthy:

  • The Democrats already have abandoned plans to raise taxes on the rich before the elections, and you can bet it will be a dead horse afterward. The Bush tax cuts will most likely be extended for all, even the rich for at least a few years. That means there will be more discretionary money in those Louis Vuitton handbags.

  • The rich also have come under fire for not spending enough and stimulating the economy. This is an abrupt change from even a year ago, when they were being attacked for spending that made everyone else feel bad. Perhaps more of the rich will recognize their patriotic duty to get out and spend, the holiday season being a good time to start.

  • The best September for stocks since 1939 has surely given the rich a healthy boost of consumer confidence. Recent research suggests that spending by the rich is closely correlated to the value of their portfolios.

  • Fears of a double-dip recession drove down the price of shares of companies producing luxury goods along with the rest of the market. And although the Dow Jones Luxury Index surged in September with the broader market, the combined price/earnings ratio of its components remains below May levels.

I've been working the luxury angle throughout the recession, so far to good effect. The LVMH Moët Hennessy Louis Vuitton shares I bought back in January 2008 are now showing a gain of over 40%. Tiffany and Sotheby's, two stocks I recommended last year, have been on a roller coaster, but both are showing solid gains in 2010.

Given the current political climate, which luxury purveyors are likely to excel? My hunch is that it will be those that promote consumption—but not conspicuous consumption—and quality over bling. Fine wine and champagne fit the bill perfectly. The Wall Street Journal recently reported that the 2009 Bordeaux vintage is setting new price records, driven by Asian demand.

At this point I'm priced out of the market for the wine itself, but not the producers. Besides being a luxury conglomerate, LVMH owns benchmark Chateau d'Yquem and a stake in Chateau Cheval Blanc, in addition to its famous champagne brands, Moet & Chandon and Krug. Another large producer of premium wines is Diageo.

Watches and timepieces are another relatively inconspicuous luxury. Everyone may recognize a Rolex, but many of the most expensive watches are known only to other connoisseurs. Many watchmakers are privately held Swiss companies, but two are publicly traded: Richemont, which owns IWC and Cartier, and Swatch Group, which owns Breguet and Blancpain in addition to its colorful Swatch brand. In September, Richemont said sales for the previous five months had jumped 37%, well above forecasts.

Tiffany is expanding into leather goods (imitating Louis Vuitton) and offers many reasonably priced luxury items besides the most conspicuous diamonds. Goldman Sachs recently downgraded Tiffany shares over near-term valuation issues, but said it remains "confident in Tiffany's long-term brand appeal."

The appetite for art seems unabated among the rich. A Picasso sold in May at auction house Christie's for more than $100 million. Why anyone would pay that kind of money for something on the wall is beyond me, but as F. Scott Fitzgerald said, the rich are different. The rest of us can get a slice of the action by owning Sotheby's stock. ( wsj.com )



No comments: