LVMH: trading opportunities remain even as stock’s lustre fades
After becoming accustomed to success, the luxury goods group is facing a decline in demand that is reflected in its share price. The blue chip stock’s downward trend has now accelerated once more in the wake of its latest quarterly figures. Whether the next step is a confirmation of this trend or the start of a comeback, traders can find attractive solutions for every eventuality on Swiss DOTS, Switzerland’s leading OTC marketplace for leveraged securities.
LVMH shares declined markedly after the company presented its latest set of results to the markets, suffering a single-day loss of almost 6% that wiped around EUR 20 billion of capital off its balance sheet. The EURO STOXX 50 stock had already been dealing with significant losses in recent months due to growing fears of an economic headwind, losing approximately a fifth of its value since it reached an all-time high back in May.
Falling short of expectations
The company’s third-quarter report confirmed the market’s fears. After the luxury sector experienced a boom at the end of the pandemic, a malaise is now spreading across the industry when it comes to growth. The French company, whose stable includes the Louis Vuitton and Dior fashion houses as well as cognac manufacturer Hennessy and US jewellers Tiffany, recorded revenue growth of just 9% as a result of high inflation and economic uncertainty. Analysts had anticipated an increase of 11.5%, though even this would not have been enough to maintain the pace set in the first half of the year. The industry leader dazzled the market at the start of 2023 with revenue growth of 17% as China reopened itself to the world.
The latest forecast miss marks a rare failure for the world’s largest luxury goods company. Investors are used to seeing LVMH surpass expectations by a considerable distance, or at least with ease. However, the latest development signals a period of normalisation within the sector.
Money for high-end goods is no longer as plentiful as before, especially in the USA and Europe. The wine and spirits division delivered a particularly disappointing performance in the most recent quarter, while the recovery in China was uneven.
Adopting a more cautious tone
The new normal in the luxury goods segment is forcing many analysts to put their previous optimism into some perspective. Although JP Morgan’s research team believes LVMH is likely to cope better with persistent volatility in the sector, they point out that current sluggish earnings growth and an uncertain outlook only provide limited scope for a total revaluation in the short term. The experts have lowered their price target from EUR 870 to EUR 835, which still corresponds to a potential of around one-quarter. RBC have also adjusted their forecast and price target. The outlook for the next year remains bleak according to analyst Piral Dadhania, who believes it is likely that downward earnings adjustments will continue in this sector.
An old stock market saying advises traders to “sell on good news, buy on bad news”. While this old rule might sound somewhat paradoxical at first, it has often served investors well in the past. However, Tashi Gumbatshang, Head of Asset Management and Pensions at Raiffeisen, points out that “you never know when a stock or company has reached its lowest valuation”. With this in mind, market timing is what matters most.
Different scenarios…
The stock’s extended price correction is likely to have already priced in plenty of bad news, especially as even the most inexperienced of investors should know that the sector has entered a phase of low growth rates. LVMH’s valuation has also fallen considerably in the meantime, with its P/E ratio shrinking markedly from the figure of around 30x observed in previous years to approximately 20x today. As a result, there is every chance that the stock could soon bottom out and subsequently rebound.
Meanwhile the technical charts are still painting a black picture in the truest sense of the word, with the so-called “death cross” recently adding to an already weakened price curve. The death cross appeared when the stock’s 100-day moving average crossed below the longer 200-day line, something that is viewed as a clear signal to sell.
…call for different investment solutions
Bearish investors could exploit the current downward momentum and venture a leveraged speculation. Of the 173 short products listed on Swiss DOTS, factor certificates and mini-futures make the most sense, as the recent surge in volatility will — unlike with warrants — have little or no impact on the pricing of either structure. One suitable option, for example, would be the factor certificate (Valor 58423067) from derivatives issuer Société Générale with a constant multiplier of 6. The short mini-future (Valor 129091575) from UBS is also worth considering. With leverage of 8.1 and a stop loss at EUR 743.166141, this product is roughly 10% away from the current price level.
One good option for risk-tolerant investors anticipating a comeback for LVMH shares is the long mini-future (Valor 110180249) from BNP Paribas. The stop loss for this product is a good 29% away at EUR 557.83, while leverage remains at 4.45 despite the significant risk buffer. For even more pizzazz, there is the mini-future (Valor 122792327), which can also be traded on trading days between 08:00 and 22:00, with a multiplier of just over 10.
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