3 Stocks To Benefit From The Trillion Dollar Wealth Transfer

Joseph Hogue's picture

Thursday, January 22, 2015 - 12:00pm

by Joseph Hogue

 

I will never forget what a key mentor told me earlier in my investing career, "You can chase billion-dollar money flows on a daily basis or you can look to trillion-dollar themes that develop over years."

 

That one lesson is probably responsible for the majority of my investing profits.

 

Sure, there is  money to be made by following near-term trends and analysis. The problem is that you will always need to be in and out before the trend reverses. Without the power of a trillion-dollar theme, the trend invariably reverses eventually.

 

Investments with the power of a trillion-dollar theme might not deliver quick gains, the kind you can score riding  the latest short-term trend. But massive support coming from a big picture theme will keep prices going higher over the long-term.

It worked for emerging market investors with a combined 2004 GDP of $3.9 trillion in the four BRIC countries but with growth that was adding nearly a trillion each year. Even after five years of sideways trading, the iShares MSCI Emerging Markets (NYSEMKT: EEM) has annualized 12.8% since its 2003 launch.

Apple, Inc. (Nasdaq: AAPL) is another solid example. Starting in 2007, when the first iPhone was launched, the company has steadily garnered a massive slice of  the global smartphone market, which is expected to generate nearly $275  billion in revenue this year. Apple shares have surged by a multiple of six since the release of the first iPhone.

 

Another trillion-dollar theme is about to unfold over the next three decades. And it is backed by a $16 trillion mega-trend.  

 

And one group of stocks is set to profit from it for years to come.

 

A Spending Spree For The Wealthy

A recent report by Wealth-X and National Financial Partners reveals that at least $16 trillion in ultra-high net worth (UHNW) boomer wealth will be passed to younger generations over the next 30 years. More than $6 trillion is set to change hands in the U.S. alone and more than 30% ($5 trillion) is in liquid assets and could be easily spent.

 

If that were not enough, this transfer of UHNW assets is only a fraction (12.3%) of the world's $241 trillion in wealth, much of which will also transfer over the next three decades. Approximately 38% ($6 trillion) of the UHNW wealth is locked up in private companies, but you can bet that a portion of the liquid assets are going to be spent.

 

And much of that spending will go toward luxury goods.

 

Luxury Stocks Could Lead The Good Life

Not only will a portion of the trillion-dollar wealth transfer be spent on luxury goods, but continuing macroeconomic trends could support stocks of luxury companies in the years ahead.

 

To be sure, times remain tough for most consumers and that gap between rich and poor remains quite wide. The wealthiest 160,000 U.S. families own as much as the poorest 145 million families, according to the London School of Economics.

 

The transfer of wealth and increasing means of the wealthy should act to drive sales for luxury brands even while the future is less certain for discount retailers. These retailers will always have to compete on price and must make do with thin profit margins.

 

Luxury brands maintain higher margins through their brand status and can charge higher prices. The Deloitte 2014 Global Powers of Luxury Goods report finds that luxury brands had an average net profit margin of 12% versus an average margin of 8.2% for general consumer product companies.

 

The report also ranked luxury-goods companies by their brand power and uncovered some of my favorite long-term stocks.

 

The Estee Lauder Cos., Inc. (NYSE: EL) ranked third on the Deloitte 2014 Global Powers of Luxury Goods report, the first U.S.-based company on the list. The company controls 25% of the globally prestigious cosmetics market, with strong brands like Clinique, M-A-C, Aveda and Ojon. Estee Lauder reports a profit margin of 10.4% and sales growth of 7.7% over the last year.

 

Shares trade for 25.5 times trailing earnings, above the average 24.9 multiple on the industry, but below the company's own five-year average of 26.9 times earnings.

 

Coach, Inc. (NYSE: COH) was number 11 on the Deloitte report and the third in terms of stocks traded on U.S. markets. Coach  controls nearly one-sixth of the North America handbags market. The company's sales in China are growing by double-digits.

 

The company reports a relatively strong profit margin of 14.5%. Yet thanks to a 2.3% drop in sales in 2014, the result of rising competition and the still-slow global economy, shares have been in a mini-slump.  Shares trade for just 14.8 times trailing earnings, well below the average 25.8 multiple for peers and below the company's own five-year average of 17.2 times earnings.

 

 

Movado Group, Inc. (NYSE: MOV) ranked 51st on the Deloitte report, but is my top small-cap pick. Shares slumped in 2014 on fears that the smartphone watch market would eat into the luxury market. Shares took another recent hit when the Swiss franc surged in value and now trade 50% below the 52-week high.

 

Global sales of traditional watches likely rose around 3% in 2014, and Movado's sales likely grew a more impressive 13%. The appreciating Swiss currency may make exports marginally more expensive, but I think the market overreacted to the news.

 

The company's profit margin of 8.4% is relatively lower than other luxury names but still above general retail margins. Shares trade for 12.3 times trailing earnings, a 52% discount to the average 25.8 times earnings multiple on its industry.

 

Risks To Consider: The biggest wealth transfer in history is about to begin, but it, and other catalysts for luxury brands, is a long-term factor. Near-term factors could still mean volatility in the stocks so be prepared to ride out weakness for a long-term holding.

 

Action To Take --> Take advantage of long-term support for luxury brands to overweight your portfolio against relative weakness in other retail names. Look for brands that maintain higher margins on their status and have been able to boost sales.

 

Like I wrote above, long-term trends often turn into the largest gains. My colleague Andy Obermueller devotes his time to researching the next Game-Changing Stocks. As I did above, he analyzes current trends to identify companies with the potential for triple-digit returns. This has led to gains of 89%, 92% and even 310% in a year. StreetAuthority compiled a list of the hottest upcoming trends called "The Hottest Investment Opportunities For 2015." For more information on the game-changing opportunities that could crush the market, click here.

 

 

Joseph Hogue does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of AAPL in one or more of its “real money” portfolios.