When professional traders at investment houses like The Goldman Sachs Group (NYSE: GS) look for places to put their capital to work, they must have a reliable process behind their selection to make the banks as much money as they do. Today, you will get a glimpse of the ‘top-down’ analysis happening right now behind the screens of these professionals.
At the end of it all, you will see why the apparel industry can be a likely place to draw attention – and investment dollars – into its stocks. More than that, the stars are aligned for you today, which is why names like Ermenegildo Zegna (NYSE: ZGN) are set to beat all other peers in the industry. Watch out for the macro developments at play; they will come in handy.
With significant upside ahead, markets are willing to bid on the stock, expecting it to make new highs relatively soon. If your portfolio is worried about the coming shifts in the U.S. economy, especially now that the Federal Reserve is creating uncertainty around interest rate cuts, stick around.
Something You Can’t Miss
According to the latest ISM manufacturing PMI data, export orders for the United States rose by a factor of 6.4% over February. This represents the largest expansionary reading out of the whole sector during that measured period, but it also means this.
Inventory levels in the United States contracted during the month and have been doing so for a while now. So, where will these customers get their products from if the U.S. has no inventories to fill these exports? There lies the need for increased manufacturing activity.
This is something that Goldman analysts have been warning you about in their 2024 macro outlook report, which you can read here. To make U.S. goods more attractive to these foreign buyers, a lower dollar is called for so they can get a decent discount and stimulate more buying.
By pricing interest rate cuts to come as soon as May of this year, the FedWatch tool at the CME Group Inc. (NASDAQ: CME) is giving you the catalyst you need to expect this lower dollar value. So why is all of this good for the apparel industry?
Lower interest rates (and cheaper money) typically spark consumer discretionary buying activity. This can be one of the reasons why the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA: XLY) has performed so well lately, rallying by as much as 26% over the past twelve months.
Returning to the PMI, the apparel industry is now leading the pack in a turnaround for expansion by showing accelerating growth readings for two of the past three months. This is enough to draw traders' attention to the sector, but why Zegna and not, say, a competitor like Columbia Sportswear (NASDAQ: COLM)?
Here is Why
Most of Columbia’s revenue (65%) comes from the United States alone, which means a lower dollar value could negatively impact its revenues. Of course, this effect could be balanced out by a resilient U.S. consumer going on shopping sprees with cheaper financing, but why run that risk.
On the other hand, Zegna’s revenues are mostly made up of international sales. Up to 76% of sales are split between Europe and Asia, with Italy and China being the primary consumers.
Mega investors like Michael Burry and Ray Dalio are slowly trickling into a China comeback play, especially now that inflation beat expectations last week. This means that Zegna can expect increased sales (on stronger currencies on a potential dollar decline) in the coming months.
Knowing what you know now, it should come as no surprise to learn that Goldman analysts have upgraded their price targets on Zegna. By shooting for an $18.7 a share valuation, they directly point to a nearly 30% upside from where the stock trades today.
By valuing the stock at a massive premium to the rest of the apparel peers, markets think that this stock could see a decent upside in the coming months. A 28.9x price-to-earnings ratio (P/E) places Zegna at a 91% premium to the sector’s 15.1x average P/E.
Remember the saying “It must be expensive for a reason” because it applies here. By projecting earnings per share (EPS) growth of 20% over the next twelve months, analysts think this is the stock to take over the 13% average EPS growth the industry expects today.
Of course, markets are bidding this stock above Columbia’s 21.8x P/E, willing to pay a higher price for the rise in international sales coming soon, as well as positive guidance from management. Don’t argue with the tape.
