Gavekal Capital: Luxottica: Languishing or Thriving?

Friday, February 28, 2014

Luxottica: Languishing or Thriving?

Along with today's release of encouraging retail sales data across a number of European countries came the similarly positive earnings results for Luxottica.  A look at our point-and-figure charts suggests that the trend for the company's stock is all but certain.  The stock's performance relative to the MSCI Europe shows the beginnings of a flag formation:


And, when compared to the MSCI World Index, we see a comparable pattern:


For clues as to whether the flag formations in the relative charts will be resolved to the upside or the downside, we can consult the absolute price chart for the company's stock.  Here, we see that the high performance trendline (dominant since early 2012) is being tested by the current consolidation.  A failure of this level of support leaves quite a bit of room for the price to fall before it encounters the traditional 45-degree bullish support line and could dampen management's enthusiasm:


Of course, if support holds, we could see continued outperformance of this European luxury retailer.  How likely that is, we cannot say for certain-- but we would note that, as a general rule, advances are rarely longer than the width of their underlying base.