3 Stocks Tracking the Luxury Trend

We've heard a lot lately about the "two-speed economy." And the widening gap between rich and poor has been reported on for years. Neither of these trends has been lost on the stock market.

The valuations of companies that sell luxury goods, goods only those in the top gear of our two-speed economy can afford, are much higher than those of their more down-market peers. These high valuations are being driven by investors placing their bets on wealthy shoppers and the companies who serve them. It's a trend worth watching, and maybe getting in on.

What would the Buddha think?
lululemon athletica
(Nasdaq: LULU  ) is the high-end yoga-gear retailer of all high-end yoga-gear retailers. A fit, fashionable colleague of mine is obsessed with her Lululemon yoga pants. If you start her talking about them, you might find it hard to get her to stop.

The company caters to those with a refined taste and the means with which to indulge it. Its P/E is currently a very un-Zen-like 58. To compare, middle-of-the-road athletic retailer Nike's (NYSE: NKE  ) P/E is a more down-to-earth 19.

Nike is bigger than big, and an extraordinarily strong, stable company, yet investor money is driving Lululemon's valuation to Himalayan heights, not Nike's.

Whole paycheck
It's not just clothing. Organic supermarket Whole Foods' (Nasdaq: WFM  ) P/E is currently a not-on-sale 35. Compare that to strip-mall favorite Safeway (NYSE: SWY  ) , with a super-saver P/E of 12.

Organic products are typically more expensive to begin with, but Whole Foods 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.

Is my mascara running?
Engaging in some original research for this article, I asked my wife which cosmetics company, Estee Lauder (NYSE: EL  ) or Revlon (NYSE: REV  ) , was the lower-end brand. "Revlon," she smirked, "is drugstore."

With that fact made perfectly and condescendingly clear, I noted that Estee Lauder's P/E is 28, versus Revlon's two. Yes, two. The stock has reached that absurdly low valuation because the company was able to take a tax deduction of $247.2 million in 2010, artificially and unsustainably boosting its bottom line.

But excepting that one-time situation, and with an average P/E for Revlon over the past five years of about 13, we can still see that it's the luxury product, i.e., Estee Lauder, that's getting the investor attention.

Follow the girl in the $100 yoga pants, Fools
Back to my fit, fashionable colleague. Besides being passionate about her $100 Lululemon yoga pants, she's also passionate about the stock, and owns shares.

So long as at least some of us are cruising merrily along at the top of our two-speed economy, the luxury market is a good bet for your money. Take note of the stocks mentioned above, and get in on the trend of surging luxury-stock valuations while the getting's good.

Speaking of profitable trends to get in on, my colleagues here at The Motley Fool have created a FREE report called "The Motley Fool's Top Stock for 2011." In it, they analyze a company set to profit from one of the hottest technology trends going. To read it now, click here.

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. Motley Fool newsletter services have recommended creating a diagonal call position in Nike. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a positively scintillating disclosure policy.


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  • Report this Comment On October 09, 2011, at 4:03 AM, rodessa wrote:

    Noticed that the P/E of LULU is currently a very un-Zen-like 58. To compare, middle-of-the-road athletic retailer Nike's (NYSE: NKE ) P/E is a more down-to-earth 19, three times less, and with customers all over the world, less risky for me !

  • Report this Comment On October 11, 2011, at 4:29 PM, XMFGrgurich wrote:

    Oh definitely. It's hard to go wrong with Nike, a true rule maker in its market space. Thanks for the comment.

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