Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Michael Kors Holdings Ltd (KORS), Tiffany & Co. (TIF): Why Now Might Be a Great Time to Buy That Diamond Stock

Over the last few years, companies that traditionally targeted the 1% have branched out. It makes a lot of sense, since the 1% is, by definition, a small group. Companies like Michael Kors Holdings Ltd (NYSE:KORS) and Tiffany & Co. (NYSE:TIF) have added smaller, less expensive — but never “cheaper” — products to their lineups. That small shift has resulted in a new luxury boomtown, with Tiffany & Co. (NYSE:TIF) stock up 43% over the last 12 months, while Michael Kors Holdings Ltd (NYSE:KORS) has risen 62%.

Michael Kors Holdings Ltd (NYSE:KORS)

With the rapid rise, some analysts have started looking for a drop, arguing that the growth has to slow as China pulls back on its own growth. There’s no denying that the connection between Asian growth and luxury growth is close, but even domestic companies are seeing great growth. So should investors be worried, or is it time to double down on the high-end?

International growth and American hope
The growth of the Chinese middle class has resulted in a boom for Western companies. On most earnings calls these days, there’s a heavy focus on expansion in China, Japan, and Korea. Last quarter, Tiffany & Co. (NYSE:TIF) opened another new location in China, and it now operates 66 stores in the region. Four more locations are coming this year, with Tiffany & Co. (NYSE:TIF) hoping that it can continue at the quick growth pace that it’s already set in the region. Last quarter, comparable sales rose 9% in its Asia-Pacific region.

The focus on China was well explained in an article by The New Yorker‘s Evan Osnos earlier this year. In summary, the growth of the Chinese middle class is not just economically driven — it’s ideological. Official documents have called the middle class, “the force necessary to eliminate privilege and curb poverty.”

At home, the growth of luxury goods has similar roots. The American middle class is slowly escaping the financial crisis — or simply tiring of its household austerity — and that’s driving more aspirational purchasing. Michael Kors Holdings Ltd (NYSE:KORS) has seen growth in its small leather goods product line, which is a lower entry point into the brand. The expansion of middle-class spending with the ever-increasing reach of the American upper class is combining to drive up profits at domestic retailers, as well.

The 1% has seen phenomenal income growth recently, and that’s spurred growth at companies like Saks Inc (NYSE:SKS) and Nordstrom, Inc. (NYSE:JWN), both of which managed 5% increases in revenue in the last quarter.

Where luxury goes next
The thesis for investing in any one of these companies has to be broader than just “luxury is doing well.” For Nordstrom, it’s about the customer experience. For Michael Kors Holdings Ltd (NYSE:KORS), it’s the rise of the brand. At Saks Inc (NYSE:SKS), you might be interested in the rumored buyout. A Tiffany & Co. (NYSE:TIF) investment might hinge on a turnaround in the brand value. However, no matter what that specific thesis looks like, it needs to be underpinned by a belief in luxury’s growth potential.

There’s one big thing that makes me worry about investing in luxury stocks, right now — the slowdown in China. Not only does it bode ill for companies focusing on China, it’s going to have knock-on effects for domestic businesses. Spending by Chinese tourists overseas is third only to Americans and Germans. That spending is helping companies out, even if they have no locations in China, and a slowdown in the economy is going to slow that pipeline.

The reason to be hopeful about luxury stocks is that the American recovery is still unfolding. While the current crush may already seem unbearably long, the country is full of upside. That’s a longer-term view than some investors are happy with, though, and with the current quagmire in the federal government, investing in a positive outcome may seem like a bridge too far.

The article Why Now Might Be a Great Time to Buy That Diamond Stock originally appeared on Fool.com and is written by Andrew Marder.

Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.