2 Top Luxury Stocks to Buy in 2017

By John Rosevear Markets Fool.com

Luxury retailers -- at least those with significant brick-and-mortar footprints -- have faced heavy bottom-line pressures as more and more shopping shifts online. But worldwide, the market for luxury goods is still strong, and there are opportunities for investors who can look beyond the broader retail story and see the growth potential of the best brands.

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Right now, I see two luxury companies that deserve a closer look from investors. One is former investor favorite Coach (NYSE: COH), which is finding its growth legs again after a rough patch. The other might be a surprise: Fabled exotic-car maker Ferrari (NYSE: RACE), an automaker that is -- as we'll see -- like no other.

Image source: Coach.

Coach: Building a strong brand portfolio

As an investment, Coach has had its ups and downs in recent years. Once a top-drawer maker of luxury leather handbags, its move into "affordable luxury" produced mixed results: Sales increased, at least for a while, but its pricing power eroded, which hurt margins. Eventually, sales fell off too, and Coach was close to some real trouble.

But the company is on stable footing now, and CEO Victor Luis has recently made some promising moves to put it back on a growth path. Among them:

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  • Striking a deal to buy Kate Spade (NYSE: KATE) -- a solid brand that can grow within Coach's existing network -- at a reasonable valuation ($2.4 billion, or a little over 16 times earnings);
  • Hiring Bergdorf Goodman chief Joshua Schulman for a newly created role as CEO of the Coach brand; and
  • Hiring a new designer, Stuart Vevers, to retool the Coach product lineup.

Kate Spade is the latest addition to a growing list of brands that includes upscale-shoe powerhouse Stuart Weitzman (and could soon include another high-end women's shoe brand, Jimmy Choo). Luis appears intent on building out a luxury portfolio that can rival powerhouse LVMH Louis Vuitton Moet Hennessy (NASDAQOTH: LVMUY); if so, he's making solid progress.

That expanding brand portfolio could drive significant growth in the not-too-distant future, notwithstanding the much-talked-about death of brick-and-mortar retail. Meanwhile, right now, Coach is doing well: It earned $0.43 per share in the most recent quarter, up 7% from a year ago. Coach attributed that gain to stronger pricing discipline -- a very good sign that also bodes well for the future.

Yes, there's some risk here, as with any retail stock in 2017. But with a plan for global growth unfolding, and a 3% dividend yield to cushion investors against the potential downside, there's also a lot of potential.

After 70 years, Ferrari is still finding new fans -- and new profit growth. Image source: Ferrari N.V.

Ferrari: Racing to higher profits

"Isn't Ferrari an automaker?" I hear you asking. It is -- but the storied Italian maker of exotic sports cars is unlike any other automaker in the world, and that makes it an intriguing investment candidate.

CEO Sergio Marchionne has argued that Ferrari deserves a valuation more like a luxury brand than like a mass-market automaker. Lately, the market has agreed: Ferrari's stock price has doubled in the last year.

RACE data by YCharts.

Right now, Ferrari is trading at a decidedly luxurious 28 times its expected 2017 earnings, far beyond the roughly 10 times forward earnings we'd expect of an "ordinary" automaker in good times. But that luxury-style valuation might be deserved, as Ferrari is no ordinary automaker:

  • Its EBIT margin was a huge 21.5% in the first quarter, and that wasn't a fluke. (Contrast that with 8.2% for General Motors -- or for that matter, Coach's 15.2% operating margin in the quarter ended April 1.)
  • Big automakers produce millions of vehicles a year, in costly factories that sometimes have to be idled when demand falters; Ferrari produces fewer than 10,000 cars, in a single small factory.
  • Ferrari's ultra-wealthy customers are more shielded than most from the economic cycles that make mainstream automakers' profits so volatile over time.
  • Even in an autonomous, shared-mobility world, there's a place for Ferrari; it doesn't face the risk of "disruption" currently confronting the mass-market automakers.
  • Ferrari's brand, history, aura, and unique (and uniquely coveted) products add up to a big moat: No other automaker can ever be Ferrari.

Ferrari also has a path to what could be significant bottom-line growth. While the company strictly limits its production to preserve its formidable pricing power, Marchionne has said that growing demand from newly wealthy people in places like China and Russia should be able to support somewhat greater production numbers over the next few years. (This is nothing at all like a move downmarket: Think 10,000 or a bit more per year, versus an expected 8,400 this year).

That sales growth, plus new, limited-edition models and options that should help push average transaction prices up to even loftier levels -- and the recent success of Ferrari's Formula One racing team, its most powerful marketing tool -- could well yield significant bottom-line growth over the next few years, without a ton of risk.

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John Rosevear owns shares of General Motors. The Motley Fool owns shares of and recommends Coach. The Motley Fool has a disclosure policy.