Jewelry stocks have been suffering. But it won't be long before consumers start spending again on this discretionary item.

That makes it an opportune time to invest in a number of jewelry companies while their share prices are low. Consider Signet Jewelers (SIG - Get Report) and Tiffany (TIF - Get Report) from the beaten down names. Signet is the better buy now for long-term, market-beating gains. Despite an unimpressive earnings report, a Goldman Sachs downgrade to Neutral, and diamond swapping allegations that chopped off nearly one-fourth of the stock value of Signet in the last month, the largest jewelry retailer in the U.S. offers good value. Signet is trading at 52-week lows but offers a robust range of products via its Kay, Jared and Zales brands. 

Rival Tiffany has slipped over 20% since the start of the year. Revenue growth was below estimates for the fourth straight quarter. But more significantly, the company has encountered executive churn and vulnerability to slowing consumer spending, particularly in its once vibrant Asian markets. That seems unlikely to change soon.

Sales and Returns

Though Tiffany arguably enjoys a stronger brand recall, its recent, declining sales are a concern. Tiffany had benefited particularly from the growth of the middle and upper classes in China and other parts of Asia. But with the slowing of the Chinese economy, the company's sales slowed.

Tiffany's first quarter revenue fell by 7% year to year, and comparable-store sales fell 9% year to year. In the fourth quarter of last year, Tiffany's revenue of $1.21 billion was 6.2% lower year to year as comparable-store sales declined 5%.

Signet revenues rose 14.19% year to year from $5.74 billion to $6.55 billion. Its portfolio includes Kay, Jared, and Zales.

Yes, Signet's capital-intensive business model limits returns but it still has managed to generate 14.5% Earnings Per Share growth every year for the past five years. In contrast, Tiffany's EPS has grown by just 4.2% per year for the last five years.

Investor Interest

Investor interest in Signet is evident with investment guru Alan Fournier adding shares. Company CEO Mark Light and Chairman of the Board Todd Stitzer are also lapping up shares. This may suggest that senior executives have confidence in the company.

Signet has denied accusations raised by contrarian investor Jim Grant that it had replaced higher quality diamonds for lesser ones. As evidence of Signet's improprieties, Grant said that Signet sold roughly 60% of its jewelry on credit. The company's stock has fallen about 22% since the allegations in May. The share price is off 32% for the year and may remain under pressure. 


This is perhaps Signet's biggest advantage. The steep decline in share price makes it a convincing value play. The projected annual 17% earnings per share growth for the next half decade is twice the 8.1% run-rate expected from Tiffany and overall faster than the industry's 12%.

At a low PEG Ratio (five-year expected) of 0.60, Signet is a compelling buy. By comparison, Tiffany trades at a stiff 2.07 times PEG. Also, on a trailing price/earnings multiple, Tiffany's 17.5 times is almost as costly as the big names of specialty retail like Christian Dior (17.8 times). Signet trades at about 13.4 times trailing earnings.

The Case for Signet

In Signet, investors now have the opportunity to purchase a business with robust competitive advantages and pricing muscle, a classic example of what Warren Buffet would love. If Signet converts a greater portion of sales into cash, it would aid return ratios. A significant margin expansion could occur though synergies with Zale Corp. Analysts see an upside potential of over 70% in Signet shares, according to median estimates. Tiffany is projected to gain less than half that estimate.

Third-quarter revenue dipped by 2.2% year to year as did sales in the second quarter (down 0.2%). And a year ago, the first quarter was no different. The verdict: Signet stock is the better opportunity.


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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.