Dispatch From Palm Springs: How to Invest Like a Player
Looking for alternative assets in this volatile stock market? I recently received an investment insight along those lines in an unlikely place: Palm Springs, California, where I spent a few days to unwind this past holiday weekend with my wife Carole.
During their heyday, entertainers such as Frank Sinatra and Dean Martin owned beautiful modernistic homes in the mountains overlooking the desert. In fact, on President’s Day, the missus and I took a tour of the Palm Desert estate once inhabited by the Chairman of the Board, located high in the San Jacinto Mountains.
One evening, while enjoying adult beverages at sunset in the far more modest Palm Springs home of a local friend, he casually mentioned to me: “See that authentic 1950s Eames lounge chair and ottoman you’re sprawling in? I bought it two years ago for $4,000; I could now sell it for at least $7,000.”
Sitting on a big return…
That represents a 75% return and it got me to thinking that antiques and artwork could serve as investment havens in these fraught times.
Indeed, the analysts at Personal Finance have commented on the increasing multi-year demand for artwork and collectibles:
“An important cultural commodity and status symbol, art provides yet another sign of the gradual shift of power from West to East…
Rising demand from collectors in China and other emerging markets should continue to elevate the prices of domestic art, while further ratcheting up the price of artworks produced by popular Western artists.”
Demand is robust from Western collectors as well. Case in point: In one of the world’s biggest private art deals, hedge-fund billionaire Ken Griffin in late 2016 shelled out $500 million for a pair of abstract paintings by Jackson Pollock and Willem de Kooning.
Now, I’m not suggesting that you run out and buy individual paintings by the likes of Pollock and de Kooning. But you can still profit from the thriving art market, by purchasing shares of Sotheby’s (NYSE: BID).
Sotheby’s is the world’s dominant and best-known broker of art, jewelry, real estate, and collectibles. The company’s operation is divided into three segments: auction, finance and dealer. Founded in 1744 in London, Sotheby’s boasts an iconic name. Art- and design-related items account for about 90% of the company’s auction sales.
The rising fortunes of the art market have been a powerful tailwind for Sotheby’s. Over the past 12 months, the company’s stock has soared 75.7%, but there’s further room for appreciation. Before the markets opened on Tuesday morning, BID shares traded at $40.9; the average analyst expectation for a one-year price target is $48.2, for a gain of roughly 18%.
Continued earnings momentum is in the cards for Sotheby’s. Analysts expect earnings to grow by 38.2% next year on a year-over-year basis, and by 15% over the next five years on an annualized basis.
With a valuation of $2.1 billion, Sotheby’s also has the virtue of being a mid-cap stock, in a year when mid-cap stocks are expected to outperform.
The Midas Metal: a smart hedge now…
Sotheby’s also deals extensively in gold objects. As I’ve written in previous issues, gold belongs in your portfolio. Let’s turn to Jim Pearce, chief investment strategist of our flagship publication Personal Finance, for specific gold guidelines.
Jim also serves as Director of Portfolio Strategy for Investing Daily. Here’s an excerpt of my conversation last Friday with Jim:
“Jim, I know you’re not a so-called gold bug, and neither am I. But the fact is, every portfolio should contain at least some exposure to gold, especially in risky times such as these. What percentage would you recommend and why?”
Jim Pearce: “I consider gold more of a hedge against global political crisis than against inflation, since its historical behavior with respect to inflation is fairly random.
But anytime things get a little unhinged in the Middle East or Russia you see gold shoot up in value, so I think 2017 will be a good year for gold. That said, I might put 5% to 10% in gold but no more than that since it is also subject to intense manipulation by parties outside U.S. jurisdiction.”
On a related note, here’s an excerpt of a reader email that I received last week:
“At age 79, the only ‘earning years’ I have left are in my portfolio. I’m in agreement with your advice: 35% in stocks and the rest in cash, bonds and inflation hedges.” — Paul S.
Paul, you’re on the right track. Got a question or feedback? Drop me a line: email@example.com — John Persinos