Amid a broad sell-off in luxury stocks, one Morningstar analyst sees promise in the sector, revealing her top picks. “The luxury sector has been quite richly valued for the last couple of years,” Jelena Sokolova, senior equity analyst at Morningstar, told CNBC Pro. She said that amid the broad sell-off, “opportunities will start to emerge for longer-term investors who are willing to look through this cycle.” The downward turn in luxury stocks kicked off in June when industry bellwether LVMH reported lower-than-expected second-quarter sales . Shares in the world’s largest luxury group fell, sparking declines in other luxury stocks amid fears of a slowdown in the sector and weaker demand from Chinese consumers. The S & P Global Luxury Goods Index is down around 12% from its recent March high, but has recovered some losses after plunging in late July and early August, rising around 7.5% since Aug. 12. GLUX-DE 1Y mountain GLUX “The luxury sector is … going sideways after experiencing years of strong growth,” Sokolova said. “Demand is not as strong anymore, so the shares have sold off quite a bit. Companies are typically quite expensive on the multiple side, but they have historically delivered growth and their profitability is quite good.” Referencing luxury downcycles over the past three decades, the equity analyst noted that they typically last one or two years. “So for investors that — like Morningstar — are looking for a long-term opportunity, this is an interesting sector to watch,” she added. Metrics Sokolova uses to assess whether to invest in a luxury stock include its pricing power history, brand visibility and financial health. She also considers factors like its investment value — or the value it would generate in the second-hand market — and its control over the distribution of its products. ‘Really compelling’ Top of Sokolova’s list is France’s Kering — the company behind brands like Gucci, Yves Saint Laurent and Alexander McQueen. Shares in Kering are listed on the Euronext Paris and also trade as an American Depository Receipt (ADR) in the U.S. Year-to-date, the stock is down around 35%. “I think Kering is really compelling at this point. It is No. 3 among luxury companies in terms of revenue,” Sokolova said. Her comments come as the company grapples with weak momentum from Gucci which accounts for almost half of the group’s revenue and nearly two-thirds of its operating profit . Sokolova remains bullish given that Gucci is “still a brand that is super well recognized, very strong in terms of pricing power and No. 2 in leather products after LVMH.” “I think it’s quite unlikely that shares in Kering will continue under-performing the industry in the long-run,” she added. ‘Core holding’ Another stock that Sokolova likes as a “core holding” is Swiss company Richemont which owns brands such as Cartier, Montblanc and Chloé. These labels service a niche segment of affluent consumers and thus benefit from “resilient demand,” according to the analyst, who said they also have “super high barriers to entry that are much less sensitive to fashion cycles.” “Despite the market weakness, the stock screens quite favorably right now,” she added. In July, Richemont said that sales were almost flat for the fourth quarter and reported a “softening of sales … in Asia Pacific.” Shares in Richemont are listed on the Six Swiss Exchange and also trade as an ADR in the U.S. Year-to-date its shares are up around 19.5%.
