The 1% Can Skyrocket Your Portfolio

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Unimpressive job numbers, slowdowns in the transportation sector, the fact that there is a TV show about nannies in Beverly Hills -- there are plenty of things going on right now that we wish we could change. But while most of the country has had to adapt to these harder times, rich people are still rich. That, as it turns out, can be incredibly profitable for you.

A sheep in wolf's clothing
We hate how the uber-rich have so much cool stuff while we are left to languish with our slightly less cool stuff. Well, revenge is sweet. As the rich keep spending, you can earn major returns. The luxury retail sector, though lately lackluster in the markets, is one of the fastest-growing areas in an otherwise so-so retail environment.

Put me in Coach
There are few luxury brands with a stronger presence than Coach (NYS: COH) . Coach has been a tremendous force as it expanded internationally and broke through to mainstream retail. If you look at a one-year return, though, the stock has underperformed and looks wobbly. Luxury stocks do seem to have a higher volatility than their less expensive brethren, though the market seems to have undervalued many of the strong numbers coming from Coach.

  • Coach has above-average revenue, gross margin, and net margin. The company grew revenue 16% in the last quarter, while the industry average was 10%.
  • The company has a very manageable debt load and an overall clean balance sheet.
  • EPS is up more than 24% from the year-ago quarter.

Those are some compelling figures for a stock that is down 14% in the past year. The company is relatively cheap, trading at only 13.5 times forward earnings. Compare that to luxury sports retailer lululemon athletica (NYS: LULU) , with a forward P/E of 27 (though I'll admit the latter has posted some impressive growth numbers lately).

The IPO that could
The markets haven't looked kindly on most IPOs this year. Sketchy investment banking practices, general corporate distrust, and questionable business models have caused most of the recent public entrants to dive right out of the gate.

One company that dodged that fate was Michael Kors (NYS: KORS) . Kors has been a great stock to own since it went public several months back, returning nearly 65% in just eight months. Kors did something similar to Coach: It built up international operations (though they're still a minor part of gross sales) and increased its product offerings. A recent slowdown in Chinese spending kicked the stock down almost 5% recently, but it's still trading at a cushy 28 times forward earnings. Kors has guided for comp store sales of approximately 20%, and the market seems to agree.

Bottoms up
Part of being rich is drinking the overpriced liquors. Yes, I like vermouth. One company that is not considered to be a luxury retailer but certainly has the brand portfolio for it is Diageo (NYS: DEO) . The beverage giant owns Tanqueray, Ciroc and Ketel One vodkas, a variety of fine scotches, and Crown Royal. It also is the distributor of Hennessey.

The company's stock performance suggests the party just doesn't stop for some people, with more than a 30% gain in a year. Oddly, the company has seen double-digit net sales growth in Russia, where you'd think they had enough vodka already.

Diageo is a safer, more diversified player than either of the other companies mentioned. The wide variety of brands the company owns ensures that it will make money, because some demographic group, if not each of them, is drinking.

What's next?
Luxury stocks are very well-covered. There are even some funds out there that specifically focus on luxury goods. This suggests it's hard to get a great bargain on one of these stocks, but there are other retailers out there that are poised to pop. Our analysts here at the Fool have chosen one such retailer as their "Top Stock of 2012." Read here to find out why and if it's right for your portfolio.

The article The 1% Can Skyrocket Your Portfolio originally appeared on Fool.com.

Fool contributorMichael Lewisowns none of the stocks mentioned. You can follow him on Twitter@mikeylewy. The Motley Fool owns shares of Lululemon.Motley Fool newsletter serviceshave recommended buying shares of Diageo, Lululemon, and Coach. The Motley Fool has adisclosure policy.
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