As arguably the world’s most prominent family of luxury brands, Louis Vuitton Moet Hennessy (LVMHF) is responsible for creating premium beverages, clothing and cosmetics, among other goods.
The high value and prestige associated with the company’s subsidiary brands often draw investors toward LVMH stock. Here are three questions you need to ask and answer before deciding if LVMH is right for your portfolio.
What Is LVMH’s Potential as an Investment?
Analyzing a stock’s investment potential is easily the area where the most investors run into trouble. While a stock’s previous performance or brand recognition may seem like good reasons to buy it, these are actually among the least useful predictors of future price growth.
This is extremely important to remember in the case of LVMH. Even with its portfolio of well-established prestige brands, you shouldn’t turn to LVMH’s history as a guide to its future performance as an investment.
A far better approach is to learn the basics of fundamental analysis. Fundamental analysis uses financial metrics from a company’s reports to determine whether it is overvalued or undervalued, as well as judge its stability.
Using these metrics, you will be much more able to determine the investment potential of any given company. Fundamental analysis skills are essential for any investor planning to invest in individual stocks.
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Alongside a basic understanding of fundamental analysis, you’ll also need to understand the difference between value and growth investing.
Growth investing is a strategy in which investors buy companies that could outperform the market going forward. These companies are often high-growth startups or venture-funded firms.
Value investing, on the other hand, relies on discovering the true value of companies and buying those that are trading at discounted rates. Both approaches have merit, but you should understand the differences and decide which one is right for you.
At present, professional analysts rate LVMH as a buy. Out of 11 current ratings, 9 recommend buying the stock and 2 recommend holding it.
On average, the target stock price from these ratings would give LVMH an 11.9 percent upside over the next 12 months.
LVMH also appears to be in a good position to benefit from the economic recovery following the COVID-19 pandemic. Be sure, however, to do your own research on LVMH or any other stock before purchasing it.
Where Does LVMH Fit Into Your Portfolio?
Creating a successful investment portfolio requires much more than just buying up shares in companies on an ad hoc basic. Before you buy LVMH stock, you should consider what role it will play in your investment holdings. This is true whether LVMH is your first individual stock purchase or you’re adding it to a well-balanced portfolio of investments.
LVMH could fit into your portfolio in a variety of different ways, depending on your exact situation and strategy. Based on its 12-month upside projections, LVMH could be an opportunity for acceptable gains without the higher risk of investing in a volatile startup or tech stock.
The company has also paid a modest but reliable dividend in all but one quarter since 1999. Because of this, it could be used to generate some predictable income from your investments. Considering what role LVMH would play in your portfolio will help you compare it to other stocks and decide whether it is right for you.
Deciding on a stock’s place in your portfolio also requires evaluating your own financial situation and your goals. If you’re a younger investor, a long-term growth strategy with slightly higher risk will likely help you build greater wealth by retirement age. If you’re just trying to maintain the value of your portfolio, a more conservative approach is called for.
It’s also important to consider diversification. If LVMH is your first individual stock purchase, it may seem sensible to buy a large stake in it. However, spreading out risk across several securities is the single best way to prevent yourself from suffering outsized losses.
Be sure to have a diversification plan in place before buying LVMH or any other individual stock. If you haven’t developed a strategy to diversify your portfolio yet, you can invest in index funds for what amounts to automatic diversification.
How Much Should You Invest in LVMH?
If you do decide to buy LVMH stock, you’ll have to decide how much money to put into it. Investing in any single stock carries a larger level of risk than investing in an index or low-cost ETF. A common rule of thumb for investors is that no more than 5 percent of your portfolio should be in any one stock.
Using this rule, a $100,000 portfolio should contain no more than $5,000 worth of LVMH. You can easily use this rule to find out how much you can safely invest in LVMH.
Of course, the amount you choose to invest will also depend on your financial goals. If you’re using LVMH as a hedge in a portfolio that’s otherwise focused on higher returns, you might choose to hold only a small number of shares. If you were using its dividend for dependable income, though, it could make more sense to run closer to the 5 percent safe maximum.
Before purchasing LVMH or any other company, you should also make sure you have a financial safety net in place. Traditionally, financial advisors recommend an emergency fund equal to 3-6 months of essential expenses. Getting your savings in order before you begin investing seriously will help you ride out the ups and downs of the market and realize larger gains over time.
By answering these three questions, you can make an informed decision about whether to buy LVMH stock. Applying these principles to any stocks you’re thinking of buying will help you build a more successful portfolio that will support your financial goals.
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