MINNEAPOLIS (Stockpickr) -- It is getting more and more difficult to find ideas that work in this market environment. Stocks are moving wildly with no rhyme or reason. Nothing makes sense -- or so it seems.
Yes, it's frustrating -- but don't throw in the towel just yet. Today, I'm turning to companies with premium brands that cater to the higher-end consumer. The wealthy are still spending, and that can translate to profit growth for these companies. There's money to be made here -- for investors, too.
Take Nike, for example. Last week, shares exploded after the company reported strong earnings for the quarter ended Aug. 31. The absence of any reduced guidance was enough to trigger a rally in the stock.
What was particularly striking about the action in Nike shares was that the stock was priced at a premium to expected growth. The average Wall Street estimate for profit growth from the previous fiscal year, ended May 31, to the current year was 16%. Before the report was released, Nike traded for 19 times current fiscal year estimates.
One reason for that premium valuation is that Nike is generating premium profits. The company makes its money off its brand. The Nike Swoosh is now iconic. As a result, the company is able to charge higher prices for its goods. With labor and material costs still low, profit margins are higher at Nike than they would be at a similar company with a lesser-known brand.
With that in mind, here are
One of the reasons Nike is doing well in this environment is the power of its brand. Over many years, the company has worked hard to be identified as the best of the best in the sports apparel business. Look no further than to its expensive marketing contracts with top-tier athletes to see how far Nike will go to build its air of exclusivity. The masses follow -- after all, they want to be the best, too. For the Nike brand, they'll pay whatever premium prices Nike charges.
In the jewelry business, that same premium can be found at
. The power of its little blue box has intoxicating effects on consumers.
Shares of Tiffany have gained more than 50% over the last 12 months, in spite of the recent market selloff. Fueling that growth has been strong operating performance. The company has bested analyst estimates by a wide margin in the last two quarters.
For the full year ending Jan. 31, 2012, the company is expected to make $3.73 per share, with that number growing 13% to $4.22 in the following year. At current prices, shares trade for 19 times current-year estimated earnings. If the company keeps beating estimates and doesn't lower guidance, Tiffany shares will continue their ascent.
Tiffany, one of the
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2011 has been a tough year for clothing retailers, but not for high end designer clothing company,
. Its shares have gained 31% so far this year, and the stock has come away unscathed from the viscous selling of stocks in the overall market since mid-July. Strong operating performance will have that sort of impact on investors.
In three of the last four quarters, Ralph Lauren has beaten the average Wall Street estimate by more than 20%. In the last quarter ended June 30, the company beat estimates by 30%. That is impressive performance no matter how you cut it. No wonder the stock did so well during this recent correction.
For the full year ending March 31, 2012, Ralph Lauren is expected to make $6.77 per share according to average Wall Street estimates. Those earnings are anticipated to jump 15% to $7.78 per share in the following year. At current prices, shares of Ralph Lauren trade for 21.5 times estimated earnings for the current fiscal year.
That premium is more than justified given the performance of the company. Analyst estimates for the current quarter have barely budged, despite Ralph Lauren hitting the ball out of the park on an operating basis. Look for the earnings-beat trend to continue as this designer brand rolls forward.
As of the most recently reported quarter, Ralph Lauren shows up in
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True Religion Apparel
Does spending $100 or more on a pair of jeans make sense? Probably not, but consumers seem willing to pay up for their denim, regardless of economic conditions. Investors, though, might not be so convinced of the power of expensive jeans. Shares of
True Religion Apparel
are up 34% since the start of the year but have traded sideways since May.
The hesitation by the market is understandable. That said, fears of a drastic slowdown in consumer spending have yet to materialize. Over the last three quarters, True Religion profits have exceeded average Wall Street estimates. In the period ended June 30, the company earned 38 cents per share -- 5 cents per share better than the average Wall Street estimate. That's not bad, considering the economy supposedly paused during the second quarter.
The stall in share price appreciation creates an opportunity for investors today. The average Wall Street estimate for the full year is $1.92 per share. That number improves by 18% in the following year to $2.27 per share. At current prices, True Religion trades for just 16 times current-year estimates.
If the company keeps performing as it has over the last several quarters, shares can be expected to gain from current levels. I would buy this stock at these prices.
In this day and age of low-priced labor, making a handbag has become relatively inexpensive. If you can sell that bag for a premium price, all the better. When you buy
, you are not buying just the bag -- you are buying the label. But to do so, you have to pay a high price.
This luxury seller of consumer accessories saw shares plunge in mid-July; Coach dropped by more than 30% before bottoming in late August. The stock has recovered about half of that value to date thanks to a recovery in the market. Look for more gains when the company reports results for the third quarter that ends on Sept. 30.
Over the last four quarters, the company has beaten average Wall Street estimates, showing no sign of a slowdown in profit growth. For the full year ending June 30, 2012, the company is expected to make a profit of $3.39 per share, with that number gaining 16% to $3.92 per share in the following year. Currently, shares trade for 17 times earnings.
Following Nike's example, Coach could jump 5% to 10% with a strong report in the current quarter.
Coach was featured recently in "
One luxury brand that is lagging other stocks in the category is
. Shares have gained only 6% so far this year. The company missed analyst estimates during the first quarter, sending shares lower. A strong rally in June was abruptly halted when the market collapsed in mid-July. Harley shares spiked higher after reporting results that beat estimates for the second quarter, but the stock has traded in choppy fashion since.
While the market gyrates, Harley is poised to grow profits. Its brand remains the definitive luxury name in the motorcycle world, and consumers are still buying their hogs. The strong operating performance in the second quarter pushed Wall Street estimates higher. For the current quarter, the average Wall Street estimate is now 75 cents per share, or 10 cents higher than it was 90 days ago.
For the full year, the company is expected to make a profit of $2.35 per share. That number jumps 27% in the following year. With shares trading for just 16 times current-year estimates, Harley Davidson shares are cheap. I would buy the stock at these levels.
Harley Davidson, one of the
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-- Written by Jamie Dlugosch in Minneapolis.
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At the time of publication, author had no positions in stocks mentioned. Jamie Dlugosch is a founder and contributor to
MainStreet Accredited Investor
. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to
The Rational Investor
The Prudent Speculator
Penny Stock Winners