Investment Contrarians

Hey Investor: Sotheby’s Is Going Once…Going Twice…

By for Investment Contrarians |

Hey Investor: Sotheby’s Is Going Once…Going Twice…If you happen to be one of the few who subscribes to the “trickle down” school of economics, things aren’t looking good. Some well-heeled investors, tired of the volatility of stocks and bonds and the shrinking value of the greenback, have turned to hard assets, like art, to protect their assets.

The upper crust don’t necessarily collect art, so much as invest in it. Many even consider art to be another hard asset class like stocks, bonds, commodities, or precious metals. They may be onto something.

The Mei Moses All Art index, a leading indicator of art returns based mainly on paintings sold in New York and London, climbed 22% in 2010 and 10.2% in 2011, seriously outpacing the S&P 500’s total return. (Source: “S&P 500 Total Return,” YCharts, last accessed January 7, 2013.)

In spite of the global recession, 2012 looks like it was another banner year for art auction sales, with three of the major houses—Christie’s, Sotheby’s (NYSE/BID), and Phillips de Pury’s—beating previous records.

Sotheby’s and Christie’s auctions in New York City took in over $1.4 billion in combined sales. Almost $1.0 billion of it was raised in two evening sales of contemporary art alone. (Source: “Sotheby’s and Christie’s Break Auction Records,” ArtsEditor, December 15, 2012, last accessed January 7, 2013.)

That doesn’t mean investors in Sotheby’s—the lone, publicly traded art auction has been seeing the same kinds of returns.

Sotheby’s Commom Stock Chart

Copyright Lombardi Publishing, 2012;
Data source: Yahoo! Finance

After climbing steadily higher throughout the 1990s, Sotheby’s share price dropped in early 2000, after the tech boom fizzled and the wars in Iraq and Afghanistan commenced. It rallied again when the broader markets strengthened, and then fell off a cliff in 2008 when the global markets tanked.

And, like before, it rebounded. But lately, it’s been stalling. In the face of ongoing economic uncertainty in the U.S. and eurozone, coupled with the lingering effects of the fiscal cliff and tensions in the Middle East, Sotheby’s has been in a holding pattern, while art buyers and investors alike wait to see where the global economy is headed.

In fact, at no point in the last 20-plus years has Sotheby’s share price been in as long a holding pattern as it is now.

Historically, art prices do not run or fall in step with the stock market per se; rather, prices match changes in wealth creation and destruction. In 2008–2009, investors saw their holdings wiped out. This was echoed in Sotheby’s share price.

Today, we’re not seeing a lot of wealth creation or damage. This, too, is reflected in Sotheby’s flat-lining share price.

Why the record auction results? With fears of the “fiscal cliff,” a devalued currency, rising inflation, projected anemic economic growth, and ongoing geopolitical tensions, investors have been looking for hard assets to protect their wealth. And there are few wealth generators like the world of fine art.

Unfortunately, with fewer strong pieces coming onto the market and wealth creation nowhere in sight, the record prices set in 2012 likely won’t be replicated in 2013. And, with economic and political uncertainty putting a dent in consumer confidence, I can’t see Sotheby’s share price gaining steam anytime soon, either.

Current weak economic conditions mean art collectors are more cautious. Stagnating incomes do not translate into increased spending and long-term growth. If the economy continues to languish, it could be dark days for art collectors.

And investors.

Even though the international art market has been running full steam, Sotheby’s has been struggling. And not for lack of trying. On February 28, the company said full-year 2011 revenue increased 7.4% year-over-year to $832 million, and was up 71.0% over fiscal 2009. Investors celebrated by sending Sotheby’s share price down 14.0%. (Source: “Annual Report 2011,” Sotheby’s, February 28, 2011, last accessed January 7, 2013.)

That said, if Sotheby’s does take another precipitous plunge under $10.00, it could provide penny stock investors with an interesting opportunity. As a bellwether for high-end economic sentiment, Sotheby’s always seems to be one of the first to rebound.

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