Poor man wanna be rich, rich man wanna be king
And a king ain't satisfied till he rules everything
-Bruce Springsteen, Badlands
Sometimes it pays to be a bit of a snoot. To look down at the serfs, peasants, poor people and middle-class work-a-day slugs who populate society (even if you fit into these or similar categories). As an investor, there's no time like the present to take such a snobbish approach.
In early June, I noted:
... good reasons exist for economic uncertainty. In this type of environment I do not want to be invested in too many companies that require consumers to have and spend disposable income, unless the business is (a) a powerhouse and (b) targets an upper-end consumer (e.g., Lululemon (LULU)). Instead, during times like these, I prefer to side with companies in, or closely related to, the consumer staples sector.
In later articles, I followed up on that line of thinking, placing focus on several high-end retail and closely-related stocks. In this article, I tie it all together, reviewing the past suggestions I made and illustrating ways to move forward. In an article that will follow this week, I investigate the flip side - investments that will do well in an economy that does not favor the poor and everyman.
The Wall Street Journal offered support for my high-end contention in an article over the weekend, Luxury Goods Continue to Shine. The article credits Asian tourists and the "psychological resilience of the ultra-rich" for spending on high-end goods in the face of political and economic problems spanning the globe.
Place matters in this argument. Or, precisely, where you live or spend much/most of your time impacts your mindset, which, ultimately, helps dictate your approach.
If you live in Vancouver, for instance, where money from Asia, arguably, has driven real estate prices through the roof, you can buy the high-end premise. If you live near me in Santa Monica or in other affluent pockets of North America such as San Francisco or Manhattan, it's easier to swallow the notion that plenty of people exist to buy expensive cheese, luxury cars and fancy purses. You see it happening everyday, while those who live in some random place in middle America might provide the perception that people, everywhere, hurt financially and are making sacrifices.
Each of the following companies sell things, ranging from big ticket items like cars to staples such as groceries. What ties them together is the target market - the upper-middle class, the affluent and the "ultra-rich."
Company (Ticker) Price When First Suggested (Date Suggested) Market Price, as of midday Monday, 8/01/2011 Tesla Motors (TSLA) $22.70 (March 28) $28.33 Whole Foods Market (WFM) $63.49 (March 29) $65.57 Lululemon (LULU) $89.94 (June 10) $60.91 (Note: 2-for-1 Split, compares to $121.82) Coach (COH) $52.70 (April 1) $63.80 Nordstrom (JWN) $45.11 (April 1) $49.56 Saks (SKS) $11.42 (April 1) $10.40
In each case, I advocate several ways to go long: dollar cost average into the stock, purchase call options with January 2012 and later expirations and/or sell put options at a strike price you would be comfortable taking a long position in the underlying stock at.
Generally, these companies stay true to serving an upper-end market. While Whole Foods' focus on lower-priced branded items has paid off and Tesla's electric vehicles will only get cheaper, I don't see these moves as shifting away from that core.
One stock I would like to include in this group, but cannot, is Apple (AAPL). Apple's case, however, proves instructive to this conversation. Market observers always look for the one thing that might end bringing Apple down, assuming, one day, that will happen. If I had to point to one thing today, it does not involve Steve Jobs' health or hitting a wall with regard to innovation. Instead, Apple could suffer by becoming too mass appeal.
Certainly, in the short run, the ubiquitous iPod, iPhone and iPad drive massive revenues for Apple. A sizable segment of investors consider it insane to argue that the company should not push these products in an attempt to get one in everybody's hands. And they maybe right. The impact that the iPad, for instance, has on not only everyday life but in schools and medicine is remarkable.
That said, once a product ceases to be cool, it can lose its sizzle in the consumer market. The entire idea of being a hipster is built around the notion that you're part of a culturally-important trend or phenomenon that has yet to become completely mass appeal.
When you walk into the local coffeehouse fiddling with your iPhone, you are now little more than one of the crowd. When you sit down, however, and flip open your $1,500 Macbook you still reserve much of that coolness factor the wretched and tired masses simply cannot claim.
Over the long-term then, does it make sense for a company that sells hip and quality products to consumers to price them high and keep them just out of reach of All the servants in your new hotel? It's an interesting quandary. And for the companies mentioned in this article, it's a nice one to face, knowing that, no matter what, you'll likely have buyers even in a lackluster economy.
Disclosure: I am long TSLA.