I hope you had a great week! As always, there has been plenty going on in markets for us to monitor. The S&P 500 marked its best week in 5 as Facebook and other technology names boosted the index along with a rally in the defense sector. In FX, GBPUSD and USDJPY have seen gains, as we correctly anticipated in our recent Trading Club video analyses. The big surprise, contrary to what our Checklist process indicated, came in the Canadian dollar which strengthened versus the US dollar as Crude Oil rose on reports that Donald Trump and other Western leaders were planning a missile strike on Syria in response to Saturday’s suspected chemical attack.
One of the highlights amongst this was the positive news coming from French luxury goods manufacturer LVMH, who reported double-digit sales growth that was well ahead of analyst estimates. Citing strength in Chinese consumer demand alongside online sales, we wanted to investigate whether LVMH might be set to return cash to shareholders along with other players including Hermes, Kering and Richemont (and that’s exactly what we did in this week’s Trading Club meeting, available now to members!).
There’s also an interesting catalyst I discussed relating to social media usage and the growing anxieties and aspirations amongst brand conscious users of the likes of Instagram (more on that in the video). As always, we analysed the idea using our Company Analysis Checklist based on the 5-factor model featured and explained by Lex in our Million Dollar Traders course.
First up on our Checklist, we looked at the Return On Assets (ROA) for the peer group as a proxy for how well each company is being managed. As you can see, Hermés led by a mile, although there was notable improvement relative to recent history for Gucci owner, Kering. Richemont exhibited a less stable ratio than LVMH, but as a group they all displayed a Return On Assets well above that of the market (around 4-5%, not pictured).
We then assigned a score to each company based on what we made of the data for the management component of the Checklist.
Having completed the first step on our Checklist, we went on to analyse each company from the perspective of its products and financial health, before arriving at the valuation component (shown below). Whilst there was a lot of data to consider, our scoring model allowed us to determine a rating for each company based on how cheap or expensive they appeared based on the fundamental ratios we highlighted.
This provided a score to mark on our Checklist. As you can see Richemont was the only company trading at a relative discount to its history, with LVMH and Hermés looking fairly rich currently. Kering trades at only a slight premium which is notable given its higher growth rate as we observed in the previous categories (not shown here - scores for the other categories have been obscured to preserve value for our subscribers, and enable us to share our process with you publicly).
Having finally considered the geographical exposure for the peer group, we arrived to a final score for each company on our Checklist. As I began this blog with reference to LVMH, I thought that it would be fair to share the total with you (coming in at 2.7), alongside Richemont (1.3) for comparison. What is clear from this is that overall, having considered each factor on our Checklist, LVMH may provide a better potential investment to Richemont as things stand currently (Please remember, this is for educational purposes only and should not be considered investment advice - see our company disclaimer for more).
But what about Kering and Hermés? Do they present a better score to industry leader LVMH? You’ll have to join us as a Trading Club member to find out! (Spoiler: At least one of them does, and they are on my watchlist).
I hope you found this interesting, and wish you a fun weekend!
See you soon,
James Helliwell | Chief Investment Strategist
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