Are These "Artsy" Picks Safe From e-Tailers?

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Investing in art and jewelry just might be too capital-intensive and/or too speculative for the average retail investor. The practical option here perhaps would be to invest in companies catering to the luxury or high-end markets like Sotheby’s (NYSE: BID) or Tiffany & Co. (NYSE: TIF). The U.S. economic recovery may be not as robust as many would wish, but certainly the recent fundamental strengths it exhibited, such as gains in employment and the rise in disposable incomes, augur well for these equities' respectively iconic fine arts and jewelry.

Both companies are established brand franchises. Sotheby's has been pounding its gavel in auction sales in global centers, while also enticing retail consumers internationally for more than two and a half centuries. The same is true for Tiffany, established 1837, whose blue box provides delight through its 115 stores across the globe, and strong online presence.

Per a brand audit research, Tiffany is head-and-shoulders above direct competitors Cartier, Pandora, and Swarovski, in terms of top-of-mind awareness. Also, a survey by the Luxury Institute affirmed that Tiffany jewels are the most widely purchased by women consumers in the U.S. with minimum net worth upward of $5 million.

Robust stand vs. marauding Amazons

While these ladies constitute only a small segment, their preference as consumers provides an indication that the high-end domains of Tiffany and Sotheby’s are unlikely to be successfully invaded by mass market e-tailers like Amazon (NASDAQ: AMZN). After having established a beachhead in wines recently, Amazon is now reportedly hot on the comeback trail in selling fine arts through tie-ups with galleries, a venture it tried but abandoned years back with Sotheby’s.

The element that Amazon obviously lacks is what Luxury Institute CEO Milton Pedraza calls “relationship selling,” which when cultivated enough, can help bolster sales in both size and frequency. A majority of the elite patrons of Tiffany, for instance, appreciate handwritten thank-you notes from the jeweler’s salespersons they deal with.

When emotions rule

Such an emotional experience can be equated with the “theatrical performance,” which one study has defined as one of the distinct differences of live bidding from online bidding on auction items. This is one major hurdle that Amazon has to overcome if it is to eat into the arts market share of its ex-partner Sotheby's, or steal customers from Tiffany. While it is true that online art sales are being made with just images and whatever web-based information is provided, most serious art collectors not only want to personally see the works, but also talk to the curators, if not the artists, in order to establish the history behind an opus on sale.

My take, therefore, is that the forays of Amazon and its ilk in taking e-tailing into high-end market, are unlikely to shake the foundations of Tiffany and Sotheby’s as investment possibilities. Those artsy investors who may even be thinking of having Amazon as an alternative pick with its reported ambitions to rejoin the art circle, are likely to be turned off by the current “nosebleed valuation” of this equity. It trades at a forward one-year P/E around the mid-90s, which seems like betting heavily on the works of a fledgling artist.

Looking more attractive, Tiffany has a forward one-year P/E ratio that barely touches the 20s, The jeweler also had an appreciable 2013 first quarter with its worldwide sales rising 9% and net profit gaining 3%. With faster growth in Asia and lower-price silver jewelry as the main primers, it expects 6-8% sales growth for this year, a pace that Wall Street sees as a return to more robust gains for the company. Notably, Tiffany is adding 14 company-operated stores this year; seven in Asia-Pacific, six in the Americas, and three in Europe.

Although Sotheby’s 2013 first quarter was a bit rougher, its one-year P/E valuation close to 18 appears inviting. For the most recent quarter the auctioneer had a 3% drop in revenues to $101.7 million, despite an increase in auction sales. Its auction commission margins, which trended lower for the quarter, have been strengthened recently to help in revenue improvement.

Conclusion: Ready for the challenge

As a final take, Sotheby’s looks ready to fend off any incursion of e-tailers like Amazon on its turf by adopting the same technological tools wielded against it. Company chairman, president and CEO Bill Ruprecht said Sotheby’s is "continuing to redefine and personalize the company’s client experience." These initiatives, he said, include the delivery of web-based tools so that company clients across the globe can engage Sotheby’s “anywhere, at any time on any device” and access private sales shows be it in New York, London, Hong Kong, or China and elsewhere.


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Arturo Cuevas has no position in any stocks mentioned. The Motley Fool recommends and Sotheby's. The Motley Fool owns shares of Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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