Hermessence

Courtesy of Hermes

Long gone are the days of sumptuary laws. Fine gems, furs, gold and rich fabrics were verboten to the hoi polloi and wearing them meant risking punishment or sometimes, death. Today, the biggest risk to indulging in a bit of luxury shopping is carrying a balance on your credit card. Not ideal but some distance from summary execution.

But in a world where luxury is available to nearly all, how do we define it? And what’s with all the qualifiers? Today we hear terms like “affordable luxury”, “aspirational luxury” and “absolute luxury”…My favorite definition of luxury comes, not surprisingly, from Hermes: “That which can be repaired.” 

Many years ago a friend bought his mother a classic black Birkin in a vintage shop in Paris. The bag was authentic but missing the lock and key. The salesman assured them that if they took the bag to the Hermes boutique on Rue Faubourg, they could replace the missing accessories.

But at the boutique they were informed, “Before we can sell you the lock, we must send the bag to our spa. The leather is dry and stressed. You will be contacted in a few months when the bag has fully recovered.” (Readers will be pleased to know that several months and several hundred Euros later the bag made a full recovery.)

Lately the markets have been more than a little stressed themselves. During the volatility of the past few weeks, broad swaths have been hit, chief among them oil and gas exploration companies and related industries such as pipelines, heavy machinery, and even some financials.

A good question would be: Which of these companies can, like the Hermes bag, be repaired?

Whenever sentiment turns against a sector, perfectly decent, even great, companies suffer collateral damage. While the price of oil is not going up anytime soon, rest assured that it will go up again. Companies with solid balance sheets, manageable levels of debt, astute management who are savvy capital allocators, and who attract patient institutional investors, will do just fine. Their stock valuations will be repaired.

Junior exploration companies, or highly-leveraged small-and mid-caps are less likely to fare well. Some will get acquired by larger firms who will cherry-pick the best. The remainder will twist in the wind burning cash, slashing dividends and capex, and praying for a recovery in the oil price before their stock certificates end up as landfill.

While business strategies at high-luxury companies do not naturally translate to firms in other industries, (for example luxury companies are not too concerned about the cost of production; goods will be priced to ensure high profit margins), a few general rules still do apply. Among them, of course, is Warren Buffett’s adage to invest in companies with a wide economic moat.

Companies like Hermes benefit from an indelible aura of luxury, including their famous after-service. This gives them, in Buffett parlance, a wide economic moat. When they stumble, as all companies do at some point, they recover.

Oil stocks are experiencing a rapid vertical compression. But they’re not all lemons and many will make a full recovery. Here’s what to do: Find a charming café and order a citron pressé. Sip it slowly while browsing the financial pages. You’re bound to uncover a few oil patch gems. Or, you could always just buy an Hermes bag because their prices only go up.