Wealthy Shoppers Must Pay a Premium for Their Favorite Companies
Sep 28th 2011 8:30AM
Updated Sep 28th 2011 8:33AM
We've heard a lot lately about the "two-speed economy," where the wealthy flourish and the less affluent fall farther and farther behind.
The widening gap between rich and poor has been reported for years, and the trend at both ends has not been lost on the stock market.
The valuations of companies that sell luxury goods -- goods that only those in the top gear of our two-speed economy can afford -- are much higher than those of their low-gear peers. These high valuations are being driven by investors placing their bets on wealthy shoppers and the companies that serve them.
It's a trend worth watching, and maybe getting in on. Here are three areas where the gap between rich and no-so-rich valuations is worth noting.
The upwardly mobile doing the downward dog: lululemon athletica (LULU) is the high-end yoga gear retailer of all high-end yoga gear retailers, and investor money is driving Lululemon's valuation to Himalayan heights. The company currently has a very un-Zen-like P/E of 58. To compare, consider middle-of-the-road athletic retailer Nike (NKE). The company is bigger than big, and extraordinarily strong and stable. Yet its P/E is a more down-to-earth 19.
A rich diet of pricey produce: Organic products are typically more expensive to begin with, but Whole Foods (WFM) is also selling a "shopping experience." The stores are beautiful. You feel like you've climbed a few rungs up the social ladder just by entering one. That feeling of luxury doesn't come cheap. The company's P/E is currently a pricey 35. Compare that to strip mall favorite Safeway (SWY), with a super-saver P/E of 12.
Lush lashes: Engaging in some original research for this article, I asked my wife which cosmetics company, Estee Lauder (EL) or Revlon (REV), was the lower-end brand. "Revlon," she smirked, "is drugstore." With that made perfectly clear, I noted that the P/E for Revlon shares is a meager two, especially low because of some unusual tax treatments. Estee Lauder bats its eyes to the well-heeled and sports a tear-inducing P/E of 28. Here again, it's the luxury product that's getting investor attention.
Investors Love Luxury
As long as at least some consumers are cruising merrily along at the top of our two-speed economy, the luxury market is a good bet for your money.
Motley Fool contributor John Grgurich doesn't feel nearly cool enough to shop at Whole Foods, nor does he own shares of any of the companies mentioned in this article. The Motley Fool owns shares of lululemon athletica and Whole Foods Market. Motley Fool newsletter services have recommended buying shares of Lululemon Athletica, Whole Foods Market, and Nike, and have recommended creating a diagonal call position in Nike.