Goldman Missed Breakfast At Tiffany's, But Is There Time For Leftovers?

This morning Goldman Sachs made a call to upgrade Tiffany's TIF from Sell to Neutral, on a valuation call. Well Goldman, Tiffany has been one of the best performing stocks in the past year, why upgrade it now? Here's their reason: "We are upgrading TIF to Neutral from Sell as the stock is within 4% of our prior $68 price target. While the stock has corrected recently, our negative three-pronged thesis failed to materialize as: (1) Japan has recovered faster than we expected after the earthquake in March; (2) TIF has successfully passed on higher input costs with no resistance ;and (3) the valuation has expanded to trade in line with global luxury brands rather than domestic discretionary retailers. Since downgrading TIF to Sell on 9/23/10, shares are up +63.5% vs. the S&P 500 +12.0% and +72.9% vs. S&P 12.5% over the past 12 months." Goldman missed out on a near 65% run, and now they are telling you to buy the stock? Seems like someone at 85 Broad St. may have missed the mark. Many on the Street have been able to catch the move, such as Brian Sozzi of Wall Street Strategies, and Peter May, the founding partner and President of Trian. In his note, Sozzi said, "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)." Goldman Sachs has missed out on the rise in value of Tiffany's inventory, which has allowed the company to sell its jewelery bought at depressed values and selling them at much higher prices. One of Tiffany's largest markets, Japan, has been able to recover faster than expected, but we are starting to see an economic slowdown in the United States, and Europe is blowing up right before our eyes. So does this mean that Goldman was late to ball and investors should sell? Not necessarily, at least if you believe May's comments from Ira Sohn just a few months ago. In May, May said that Tiffany could be worth $100 per share eventually, as he sees significant same-store-sales growth ahead, and operating margins rising 0.5% per year in the coming years. The company also recently entered into a joint venture with Swatch to expand Tiffany's watch business, which May believes will be a huge growth driver. Given the recent 8% or so correction in the broader markets, Tiffany shares are about 15% off their 52 week highs, and sport a 1.6% dividend yield to help investors be able to manage their positions. Breakfast at Tiffany's is over. If Goldman's upgrade call is correct, perhaps there will be enough left over for another meal. ACTION ITEMS:

Bullish:
Traders who believe that May is correct might want to consider the following trades:

• Go long Tiffany's. Aside from the drivers mentioned in the article, there are others that May mentioned at Ira Sohn which he believes will drive the share price towards $100. He's been in the name since 2007, and has caught a tremendous run since the bottom in the name. It makes sense to listen to his thesis very hard.

Bearish:
Traders who believe that Goldman's $68 price target is more accurate may consider alternate positions:

• Short Tiffany's. Shares are trading $5 above Goldman's price target, but the New York investment bank has been wrong for the past 65%. Are they right now?

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