How Should You Protect Yourself from the Next Recession? Invest in Ferrari
Politically incorrect? Perhaps, but as more and more economists are discussing the growing income gap between rich and poor, the reality is that companies that cater to the rich, the so-called one percent, will outperform all others. Conversely, as the ‘middle class’ shrinks just about everywhere in the West, companies that focus on low income markets will also perform well. Invest in the extremes to make the income gap work for you: it might be the best strategy to protect your savings from the next market crash and recession.
The logic of this strategy is premised on the fact that the rising social unrest in places as disparate as France (The Yellow Vests), Chile, Bolivia, Colombia, Lebanon, Iraq, Iran, Hong Kong along with the increasing popularity of politicians, whom the establishment has disparagingly labeled, serve as clear signs that something is amiss. In this context, survival requires ‘contrarian’ tactic – contrarian as in do the opposite of what your instincts might suggest at first. To use modern psychological research about how humans think, use System-2 rather than System-1 (Kahneman, Thinking Fast and Slow). As an example, remember what your driving instructor said about what the best way of from a sudden skid: defy your instincts, and turn into the skid. Translating that logic to the markets, if income gaps are increasing, and the rich and getting richer, then invest in the things millionaires like to buy.
The same logic suggests that investing in companies that cater to the eroding middle and low-income classes should also pay handsomely. However, what I might dare call ‘rich people stocks’ offer a safer bet – if not downright better value. Two stocks to consider within this framework are Ferrari NV(NYSE:RACE) and Moet Hennessy – Louis Vuitton, Société Europeenne, better known as LMVH(EPA:MC, OTC:LMVUY). There are others that would fit this logic, but Ferrari and LMVH represent veritable foundations of an investment strategy based on addressing the aspirations of the rising global class of plutocrats. Consider it a hedge.
Ferrari stock has almost tripled in value since its IPO in October 2015.
Ferrari. As a brand it’s arguably the world’s most recognizable brand – yes, more than Apple or Google or even Coca Cola (Source: Brand Finance). More to the point, Ferrari has launched five new models in 2019, ranging in price from $200,000 to $500,000 in order to meet explosive global demand. There are even plans to introduce an SUV in 2021. Founder Enzo Ferrari, who started building and selling road cars in order to finance his racing activities, may roll in his grave. But, investors will be rolling in returns, considering that Ferrari earns some 22% on every vehicle they sell. Compare that to a mainstream manufacturer like Ford, which barely sees margins of 1.2-1.5%.
The exorbitant prices that Ferrari charges, and the fact that they make fewer than demand (Ferrari does not even make 10,000 cars a year, which is a mere fraction of what Ford or GM make in a single hour) might be the ‘investment thesis’ if you will. With the middle class splitting into a small but considerably higher income fragment toward the ‘one percent’ (in North America, Europe and Japan) and with rising demand for luxury cars in China, among other so-called emerging markets, Ferrari will struggle to contain production to within 10,000 units per year. And its latest offering, conceived as an entry-level GT (the Roma) will appeal to the customer , who would have considered only a Porsche, a Maserati or a Jaguar. Now, they can go straight for the jugular of the make your neighbor envious Olympics, and bring home a car, even an SUV, with the prancing horse badge. Simply put, to invest in Ferrari shares means investing in a car company that, unlike most of the mainstream manufacturers, is slated to sell more and more cars with each passing year – and not despite the fact that they are luxury sports cars; rather, because of it.
LVMH Breakfast at Tiffany’s
What kind of accessories would the Ferrari buyer choose to outfit his/her new GT? Among several companies, one comes to mind that allows investors to buy a piece of the brand: LVMH Moet Hennessy Louis Vuitton. The company, which boasts some 70 special and world-famous luxury brands under its umbrella is best described as an ‘aspirational’ brand. And in the global macro-socioeconomic context, it might be described recession proof stock. Like Ferrari, LMVH can count on much higher profit margins than its mainstream equivalents. But, unlike Ferrari, even the less fortunate might, if impulsive enough, buy a small entry-level item like a keychain, a t-shirt or a pen at one of the various boutiques. Ferrari has also started to operate this way by offering a variety of branded products and experiences (the Ferrari World theme park in Abu Dhabi for example). And LMVH is another of those stocks that has experienced extraordinary performance over the past five years:
The latest catalyst for LMVH stock comes via New York. On November 25, LVMH has managed to eat its breakfast at Tiffany’s, acquiring the famous brand known for the light blue box (perhaps the largest luxury brand acquisition ever) a month after rumors that the two companies were in talks surfaced in October at a price of $135/share for the humble total sum of $16.2 billion – that’s almost two billion more than LMVH’s initial offer of $14.5 billion.
With the sale of Tiffany’s an iconic American brand – immortalized by Audrey Hepburn in one of the most famous movies of the 1960’s – has become French. But, given LMVH’s reach, Tiffany’s global presence will only spread because it will serve as the spearhead of LMVH’s strategy to reach its biggest competitor, the Swiss Richemont SA, which generates about 50.0% of its revenue from jewelry. Tiffany’s will enable LMVH to almost double its jewelry & watch division (TAG Heuer, Chaumet, Zenith, Hublot) which accounted for some $4.1 billion in revenues in 2018. Tiffany’s also allows LMVH to gain a major presence in the lucrative ‘wedding’ business. Indeed, the company generates almost a quarter of overall revenue from engagement and wedding rings. In a more global logic, the fact that Tiffany’s has become ‘French’ should enable it to overcome some of the declining sales that have characterized the past few quarters of slight guidance misses. Most analysts attributed the sales drop to the continuing trade tensions between Washington and Beijing.
The main risk for LMVH now is geopolitical and related to the violent protests in Hong Kong, which have caused sales to drop in the ‘city state’, also affecting Macau and Taiwan in a negative sense. Note that Hong Kong alone might represent anywhere from five to ten percent of sales alone, and the rioters/protesters have kept the tourists – and their dollars – away.
Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.
Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.
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