At the end of  August I wrote about the diverging fortunes of the “Two Americas” and used the relative performance of high-end jeweler Tiffany & Co (NYSE: $TIF) and the Everyman’s store Wal-Mart (NYSE:$WMT). (See Tiffany, Wal-Mart and the Two Americas).  While Tiffany had been enjoying massive sales and profits gains—and this despite rising costs for the company’s gold and diamond inputs—Wal-Mart had posted nine consecutive quarters of declining domestic sales.  Wal-Mart’s core demographic—middle and working-class Americans—were suffering, while the global wealthy were doing just fine.

While I was not bearish on Wal-Mart (after all, if any retailer can survive a rough economy it would be the colossus from Bentonville), I recommended that investors carve out room in their portfolios for an allocation to the luxury goods sector.  In addition to Tiffany, I offered Coach (NYSE: $COH) and LVMH Moet Hennessy Louis Vuitton ($LVMUY.PK) as suggestions.

Alas, investors would have been better off just buying Wal-Mart.  As you can see in Figure 1, Wal-Mart has been the best performing stock of the group.

Figure 1: WMT, TIF, COH and LVMUY

My, what a difference three months can make.  Wal-Mart finally broke its chain of declining quarters when it announced earnings earlier this month, and Tiffany issued a disappointing outlook on Tuesday that sent its shares down more than 11 percent intraday.  The entire luxury sector fell in sympathy on fears that the Eurozone crisis would sap demand for expensive baubles and trinkets.

So are investors right to be concerned?  Has Europe killed the bull market in bling?

If Tiffany’s earnings release is any indication, the answer is an emphatic “no.”

Sales were up 21 percent and earnings per share up a whopping 63 percent for the quarter ended October 31.  Sales in the Americas were up 17 percent, and—importantly—sales in Asia were up 44 percent on strong demand from China.  Even in Europe, the epicenter of the crisis, same-store sales were up a respectable 6 percent after adjusting for currency moves.

Patrick McGuiness, Tiffany’s CFO, said in the conference call that fourth-quarter sales were “meeting expectations” but that he was “certainly not implying that Tiffany will be completely insulated” from the economic shockwaves emanating from Europe.  Analysts had expected fourth quarter earnings of $1.63 per share, but McGuiness indicated that earnings would likely be 5 cents lower at $1.58.

It’s hard to look at these numbers and see justification for an 11 percent correction, but such is life in marketland.  Markets are forward looking, and when too much optimism is baked into the stock price disappointments like these happen.  On the flip side, when too much pessimism is baked into prices, even trivially good news can send a stock’s price soaring.  Consider Research in Motion’s (Nasdaq: $RIMM) announcement Tuesday that it would open its corporate networks to iPhones and Android phones; shares shot up by more than 8 percent  before backing off slightly.

The luxury sector is a long-term macro play on the rise of the nouveau riche in emerging markets—again, note the 44 percent rise in Tiffany Asian sales last quarter.  China alone already accounts for 10-20 percent of all global luxury sales (estimates vary by market study), and emerging market as a group account for nearly half.  These percentages will only increase with time, and European crisis or not this trend isn’t going to change.

That said, luxury stocks are volatile and investors should expect a roller coaster ride until there is some sort of definitive resolution in Europe and the system is stabilized.  A recession in Europe due to tighter credit is not the end of the world.  Recessions come and go, and life goes on (as do luxury sales).  The disorderly breakup of the Eurozone is a very different story, however.  As we saw in 2008, even the rich snap their wallets shut when market conditions get bad enough.

Cooler heads will prevail.  When confronted with the possibility of European disintegration, German chancellor Angela Merkel will drop her objections and allow the European Central Bank to provide whatever liquidity is needed to stabilize the Italian bond market.  But if her past actions are any guide, she will take it to the brink.  So in the meantime, expect the market to be choppy as investors try to handicap the odds of a deal.

My advice to investors in the weeks ahead is to buy on the dips.  Use the chaos in Europe as an opportunity to buy shares of profitable, conservatively-financed luxury names like Tiffany, Coach and LVMH on the cheap.  And don’t be surprised if Tiffany’s earnings next quarter end up beating estimates.

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