Hedges are becoming harder and harder to come by. Stocks across most sectors are getting hit hard and even those operating in more resilient sectors such as oil, energy and consumer essentials are seeing increased volatility. Amidst uncertain market conditions, there appear to be 2 stocks that have indeed outperformed the market and they reside right here in our Singapore market.
They operate in a highly niche market that many may overlook given how they are not usually associated with buzzwords such as “metaverse” or “clean energy”. This is certainly interesting as we would think that we now live in a world where smartwatches are the future however amidst the tech revolution, the market for “high-quality mechanical watches” has undeniably boomed in the past year. This suttle boom has benefited The Hour Glass Ltd. (SGX : AGS) and Cortina Holdings Ltd. (SGX : C41) both of which recently reported stellar earnings.
In this article, we’ll be comparing the earnings of both stocks as well as exploring some factors as to why investors are betting on such artisanal timepieces amidst recessionary fears.
But first…
Why Luxury watches?
In all honesty, this is one sector which I haven’t been paying much attention to hence for readers out there who are new to the luxury watch sector, my findings here would be most useful to you. Though the reasons are plentiful, I’ve narrowed it down to just 3 reasons why Luxury watches make such a good investment.
1. Scarcity – Demand & Supply
Rolex produces almost a million watches a year, but surprisingly, no shortcuts are taken in the manufacturing process from what I could observe (and I’ve been to a lot of watch manufactures). Rolex is however interested in quality and efficiency.
10 things every Rolex owner should know – Insider
It takes time to make a single Rolex. Not just time, it takes ALOT of time just to make one. In this current day and age where labor (not to mention skilled labor) is everything, it is safe to say that the demand for such watches in general have most certainly outpaced their supply.
It is difficult to conclude if Covid accelerated the demand for such watches but industry experts have pointed to a fundamental change in consumer preference resulting in a “whole new generation of young collectors buying and selling watches online“. Demand has also been spurred by more traditional reasons such as said watches being more of a memento that you “buy and keep” forever (therefore removing supply).
2. A Highly Liquid/Mobile Asset
An asset class in its own right, luxury watches are considered not only to be highly liquid assets but and highly mobile assets. When we refer to such watches as high in liquidity, we refer to them as being relatively easy to convert into cash at any point. An example would be how easy it would be to sell it on platforms such as Carousell for a quick buck.
In addition, luxury watches are considered to be the most mobile of all assets in the sense that they can be easily transported (no paperwork or massive shipping involved). Furthermore, these watches can also be worn thus adding to the “social score” of their owners. This effectively makes luxury watches a type of investment that allows their owners to wear them daily and still gain a profit from them upon selling.
3. The Upward Trend
Indeed the trend is always your friend.
According to the chart above, most luxury watches would certainly have returned a sizable return on investment to their owners over time. While there are multiple reasons listed above that have led to an increase in demand for such watches, I daresay that other factors such as the “bandwagon effect” and even a degree of speculation have indeed contributed to the increase in demand for such watches.
Hour Glass vs Cortina – Earnings compared.
The Hour Glass Ltd. (SGX : AGS)
- Net profit of $92.1 million for fiscal year 1H2022 vs $52.8 million in 2H2021. (74.7% increase)
- Revenue at $561 million vs $453.1 million. (23.8% increase)
- EPS $13.44 vs $7.49 the year prior.
Cortina Holdings Ltd. (SGX : C41)
- Net profit of $68.8 million FY2022 vs $39.7 million in FY2021 (73.1% increase)
- Revenue at $716.9 million vs $436.7 (64.% increase)
- EPS $41.50 vs$24 the year prior.
Needless to say, both companies clearly outperformed the market with their earnings beating many other more established companies out there in the market.
If you’d like to learn how to evaluate stocks like Hour Glass and Cortina, join Alvin at his upcoming webinar.
Should I buy and hold the next Rolex I come across?
Although there are many examples of watches that have increased drastically in value over time, I personally think that exposure to this booming industry need not be as direct as purchasing a watch.
There indeed risks involved if you were to purchase a watch off a platform such as carousell as newcomers may now know the difference between genuine and counterfeit watches. Furthermore, if one were to purchase a watch through a dealer or 3rd party (escrow etc.), agent fees may reduce the potential return on investment.
As such, investors may wish to include the above-mentioned companies in their portfolios as part of active portfolio diversification.
Growth or Value?
The question on most of our minds for those who are not yet vested would then be “are we too late?”
Where do you think the luxury watch industry is at based on the diagram above?
Though opinions may vary, analysts at DBS do think revenue may start to moderate in time to come therefore reducing their price target from S$2.62 to S$2.54.
They cite that “The Hour Glass’s revenue are typically impacted negatively during periods of economic uncertainties.” Further “one-time” factors which caused this recent boom was also attributed to the upcoming GST increase as well as the resumption of travel-related spending. Time will only tell if such analysis would come to pass or not.
