Brian Sozzi Positive On Tiffany's, Should You Be?

Brian Sozzi is out with a

on Tiffany's

and why the stock has acted so strongly since May 2. Since that time, shares of Tiffany have risen 18%, as opposed to a 3% drop in the S&P 500. Sozzi goes on to mention all of the positives that Tiffany's has going for it, such as emerging market growth, balance sheet strength, and higher selling prices. In the note, Sozzi writes, "So why with the U.S. retail sector basically resembling a battlefield with price wars on bland products being the new normal is Tiffany's stock price sparkling? It goes well beyond the company being the only true mechanism for investors to play the high-end consumer, it boils down to inventory valuation and the dramatic appreciation in prices for gold and diamonds dating back to March 2009." Soziz goes on to mention, "Inventory is Tiffany's largest balance sheet asset, representing 45% of total assets as of April 30, 2011. Tiffany uses the average cost method to value its inventory, which assumes that the cost of inventory is based on the average cost of the goods available for sale during the period. Essentially, Tiffany has been in a sort of sweet spot the last two years, selling its flashy inventory bought at depressed prices relative to where the market is presently standing. The strong global demand resurgence has allowed Tiffany to jack up prices with relative ease. Pricing power plus cost advantages is a winning combination for margins (gross margins have expanded year on year for six straight quarters)." Sozzi concludes the note by saying, "Looked at from another angle, Mr. Market is saying that Tiffany's inventory is worth more than the carrying value on the balance sheet; inventory was bought at less inflated prices and if it were to be [liquidated] today at the market, would be worth more." Tiffany's was positively mentioned at the

at the end of May, and Trian's Peter May said he thinks shares are worth roughly $100 per share, and could conceivably be worth north of that. With that in mind, shares of Tiffany are not cheap at these levels, trading at roughly 20 times forward earnings. While shares do sport some impressive metrics, such as 18% return on equity, 25% earnings growth and 20% revenue growth, shares are not historically cheap by any metric. Analysts are looking for 69 cents per share on $783.48 million in revenues in the upcoming quarter. This is up from last year, when Tiffany's reported 55 cents per share on $668.76 million in revenues. Wall Street is expecting guidance for the subsequent quarter to be 58 cents per share on $787.27 million in revenues. Shares have risen 111% in the past 52 weeks, but are down almost 2% today, as the broader equity markets worry about concerns in Europe and in the U.S.

Traders who believe that Tiffany's is likely to continue to see extended gains might want to consider the following trades:

Traders who believe that Tiffany's is overvalued may consider an alternate positions: