The last 6 weeks have been particularly fruitful for luxury stocks. A sharp rally catalysed by Chinese policy loosening and Japanese QE has meant that the losses incurred in October have been made back and now we have returned to business as usual with share prices soaring skywards. As we approach Christmas however, the sector appears stretched on several levels. EPS Momentum is increasingly negative, directors have been net sellers of stock and the average valuation of the sector is now significantly inflated compared to its 2yr average. Is now the time to take profit or will Emerging Markets pull the stocks through what is sure to be a fiercely contested Christmas period?
The average P/E of the sector is now at 18.8x 12m forward earnings, a level which is just shy of 2 year highs. From the graph we can see that each time the sector has reached such a level, it has undergone a significant dereating.
Stocks that are currently flagging as having high valuation include MC FP, CFR VX, ADS GY and BRBY LN. Out of those stocks, MC FP has the most stress points.
- Stock continues to experience negative sentiment from analysts.
- Stock is now trading at multi year highs relative to where it normally trades against the wider sector on a 12m Fwd P/E basis.
- Short interest has risen by 60% over the past 5 days. Implied volatility has also risen by 10% over the same time frame.
- Over the past month, we have seen price become dislocated from EPS estimates, Short Interest and Implied Volatility.
- Dividend offering little comparative value.
Over the past month, earnings estimates have become increasingly negative across the Luxury sector. TOD IM, SFER IM, BOSS GY and 1913 HK have seen their EPS estimates fall by more than 2% over the past month, with TOD IM having bottom decile earnings momentum when comparing it to the wider sector. Director Dealing
Directors have been net sellers of stock over the past month across the sector, with RL US and UHR VX directors selling large portions of stock. In the case of UHR VX, an undisclosed Level A director sold 500k CHF worth of stock and over the past 2 years, transactions of this sort have been followed by a fall in the stock’s share price, as seen below.
Short interest across the sector has risen sharply over the past week, with the average level now approaching a level not seen since June. The median level of FFS on loan now stands at 3.59%.
MC FP has see the highest increase in its short base over the past week however this will be due to the impending dividend issue. More genuine increases in short interest can be seen in 3389 HK and SFER IM, with the latter stock exhibiting significant dislocation between 1 month price change and short interest increases.For reference: SFER IM short interest – now approaching 2 year high. Days to cover stand at 4.9, so limited scope for short squeeze here.