By Ned Douthat from Ockham Research on Covestor.com.

High-end jeweler Tiffany & Co. (TIF) had been fairly recession-resistant through the first three quarters of 2008, and its stock rose from its January low of $34 per share to nearly $50 in the summer.

Even with growing signs that the economy was slowing and that retail might struggle for the next few quarters, Tiffany continued to top expectations in each of the last four quarters. The iconic company tested the theory that in hard economic times, high-end retailers are more insulated from the downturn, because their affluent customers still have disposable income.

The real trouble for TIF started in October, as the economy took a turn for the worse. As Wall Street was imploding and the stock market had one of its worst months in history, there were very few stocks that did not take a serious hit.

Worse than the loss in its stock value, Tiffany's sales were notably impacted by the massive blow to consumer sentiment wrought by October's economic misery. Today was an important day for Tiffany, as it announced sales results for the holiday season (November and December). These months historically account for more than 80% of TIF's fourth-quarter revenue and the results were abysmal.

Net sales for the period sank more than 21% and total same-store sales were off 24%. The comparable sales for stores within the U.S. were particularly weak, dropping 35%, with similar results from Tiffany's flagship New York City store. Clearly, October's tsunami of bad economic news cast a pall over Tiffany holiday sales.

As bad as the numbers were, they could have been worse. As evidence, the stock battled back to just about even Thursday, after falling 11% in the week prior to the announcement. The market seems to be shaking off the abysmal sales results and the company's lowering of full-year guidance (now $2.25-$2.30).

Tiffany had wisely diversified internationally and, as of last fiscal year, 41% of sales were from outside the U.S. That percentage may in fact grow this year, as international stores grew sales much faster than domestic stores in the first half of 2008.

As an example of the appetite for the finer things among the world's uber-rich, it took only three days in early November for Tiffany to sell all eight of its diamond-encrusted cell phones for $134,000 (13 million yen) to seriously high-end clients in Japan.

As TIF stock has been pummeled during the last few months, we have upgraded the company to undervalued from fairly valued. However, this most recent report of massively slumping sales in the U.S. is certainly distressing, and may be enough to trigger a downgrade in the near future.

The prospects for improving sales in the near term seem pretty weak, as consumer sentiment is at its lowest level in decades.

In this environment, we are not recommending that investors buy stock in any company so dependent on discretionary income. Remember, many of the richest people in the U.S. do not feel as rich as they did a year ago; many have retirement accounts that have taken a 40% haircut and vacation homes with values sharply reduced by the real estate crisis. Combine that with the fact that the Obama Administration plans to raise taxes on this set of consumers, and it could spell shrinking sales for the likes of Tiffany for quite a while.

However, there is some truth to the theory that Tiffany's core clientele represent the wealthiest among us and, as such, are more likely to spend in a recession than those of us who are more susceptible to the economy's fluctuations.

Compare Tiffany to its main competitor Signet Jewelers ( SIG), which specializes in jewelry that sells for less than the average price of Tiffany's jewels (around $3,000). While Tiffany sales have been exceeding analyst expectations for the previous few quarters, Signet has missed those expectations.

Signet's sales are slumping mightily and earnings are shrinking, although they are still positive. As for share prices, TIF is down 35% in the last year vs. SIG's more than 65% decline.

At the time of publication, Ned Douthat from Ockham Research had no positions in any of the mentioned stocks. Visit Covestor.com to track the real investments of thousands of proven self-investors live for free.

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