Amid a broad sell-off in luxury stocks, Morningstar analysts have revealed the top names they see as promising for the sector. “The luxury sector has been fairly overvalued for the last few years,” Morningstar senior equity analyst Elena Sokolova told CNBC Pro. Amid the broad sell-off, “opportunities will start to emerge for long-term investors who are willing to look through this cycle,” she said. The luxury stock sell-off began in June when industry beacon LVMH reported second-quarter sales that fell short of expectations. Shares of the world’s largest luxury goods group fell, and other luxury stocks also fell on concerns about an industry slowdown and weaker demand from Chinese consumers. The S&P Global Luxury Goods Index is down about 12% from its most recent March high, but has recouped some of its losses after a steep sell-off in late July and early August, rising about 7.5% since Aug. 12. “The luxury sector is leveling off after experiencing many years of strong growth,” Sokolova said. “Demand is no longer as strong, so stock prices have fallen quite a bit. Companies are generally trading at fairly high price-to-price multiples, but historically they’ve been growing and their profitability has been pretty good.” Referring to the luxury downcycle over the past 30 years, the stock analyst noted that it usually lasts a year or two. “So for investors looking for long-term opportunities, like Morningstar, this is an interesting sector to watch,” she added. The metrics Sokolova uses to determine investments in luxury stocks include a history of pricing power, brand recognition and financial condition. She also considers factors such as investment value (or value created in the secondary market) and control over distribution of products. “Really attractive” Topping Sokolova’s list is France’s Kering, which owns brands such as Gucci, Yves Saint Laurent and Alexander McQueen. Kering’s shares are listed on Euronext Paris and trade in the United States as American Depositary Receipts (ADRs). Year-to-date, the shares have fallen about 35%. “I think Kering is really attractive at the moment. By revenue, it is the third largest luxury company,” Sokolova said. Her comments come as the company grapples with weak momentum at Gucci, which accounts for almost half of the group’s revenue and almost two-thirds of its operating profit. Sokolova remains bullish on Gucci because it “is still a very well-known brand, has very strong pricing power and is second only to LVMH in leather goods.” “I think it’s very unlikely that Kering’s share price will continue to underperform the industry average in the long term,” she added. “Core holding” Another stock Sokolova likes as a “core holding” is Swiss company Richemont, which owns brands such as Cartier, Montblanc and Chloe. The analyst said these brands benefit from “resilient demand” as they cater to a niche segment of the wealthy. The brands also have “very high barriers to entry that are much less susceptible to fashion cycles,” she said. “Despite market weakness, the stock is performing very well right now,” Sokolova added. In July, Richemont reported roughly flat fourth-quarter sales and “slower sales in the Asia-Pacific region.” Richemont shares are listed on the SIX Swiss Exchange and trade as ADRs in the United States. The company’s shares have risen about 19.5% since the beginning of the year.
