LVMH Stock Down 50%: The Luxury Giant's Biggest Opportunity In Years?

Don't Fall for Investment Hype: Why Valuation Always Matters

Dear investor,

I hope this message finds you well.

Here's something that might sound counterintuitive: if you need to convince yourself to buy a stock, you probably shouldn't buy it.

The best investments are usually obvious. They're quality businesses trading at reasonable prices, operating in profitable niches, with management teams that have proven they can handle tough times.

When you find these, the decision feels easy.

But as soon as you start hearing explanations about why you should ignore proven investing principles, that's your cue to be extra careful.

Remember what people were saying about LVMH a couple of years ago? The narrative on social media was something like:

“Quality has it’s price, bro. LVMH’s sells products with a markup. It’s only logical to overpay for their stock too!”

How did that work out for people who ignored valuation at that time?

The numbers tell the story. In April 2023, LVMH hit its peak at just over €900. Fast forward to today, and it's trading around €475.

That's nearly a 50% drop in less than two years.

Back then, the stock was trading at 5.7x price/sales, 21x EV/EBIT and a FCF Yield of ≈ 3.2%. Today, those numbers look much more reasonable at 2.8x price/sales, 14x EV/EBIT and a FCF Yield of ≈ 6%.

Your returns don't just depend on how well a company performs – they depend heavily on what you pay for that performance.

Now, I'm not saying you should hunt for the cheapest stocks in the market. Those are usually cheap for good reasons, and it takes a lot of work to separate the hidden gems from the garbage (though this approach can work if you're willing to put in the effort).

Instead, my rule is simple: just don't overpay. That's it.

Since I believe in building a diversified portfolio rather than obsessing over individual stocks, I simply look elsewhere when a company I like is too expensive. There are always other opportunities.

Because at the end of the day, it’s less about which company you buy, and more about the numbers behind it.

Let me show you what I mean. Here are some of LVMH’s profitability and efficiency metrics:

• Gross margin: ≈ 67%

• Return on invested capital (ROIC): ≈ 17%

• Return on equity (ROE): ≈ 20%

• Free cash flow margin: ≈ 14%

• Capex-to-cash flow ratio: ≈ 25%

Now forget the company name for a second. Just look at these metrics.
Imagine you find another business with similar numbers, but trading at a much cheaper valuation.

Which one would you buy today, and which one would you put on your watchlist in case it gets cheaper down the road?

It’s pretty obvious, right?

Keep this simple framework in mind. Next time you see someone spinning a fancy story about why you should buy stock XYZ despite the high price, you’ll know better.

This approach has never failed me. It keeps you focused on what matters, the facts, and helps you tune out the noise.

Plus, you’re never under pressure to buy a certain stock. You’ll always be on the lookout for other, better opportunities.

Think of it like a ranking system: you’ve got money to invest, you find 10 interesting stocks, and you compare them side by side.

You weigh the quality of the business and the valuation, and pick the best from the bunch. No need to bend your rules just because “this stock is special.”

Always compare your options.

Right now, LVMH is a much better deal than it was two years ago.

But there’s a catch: the luxury market has cooled off.

Revenues have slowed and even dipped a bit.

And if there’s one thing Wall Street loves above all else, it’s revenue growth. I don’t agree with that obsession, but I don’t make the rules, I just try to understand and follow them.

So, for now, I’m staying on the sidelines. I’ll wait to see what management says in the next 1-2 earnings calls. I don’t expect the same boom we saw from 2020 to 2022 in the near future.

Final Thoughts

Don't get caught up in stories about why valuation doesn't matter for a particular stock. Good businesses at reasonable prices have always been the winning formula, and that's not changing anytime soon.

Trust the numbers, compare your options, and be patient. The market will eventually give you opportunities to buy quality companies at fair prices.

That’s it for this one.

Until next time!

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Disclaimer: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from my research. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.