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3 Fashion Companies to Dress Up Your Portfolio

Making money is in fashion with these three makers of luxury accessories.

When it came to getting consumers to buy pricey handbags, Coach (symbol COH) always had the game-winning moves. But vigorous competitors in the high-end accessories market, including Michael Kors (KORS) and Ralph Lauren (RL), appear to have stolen Coach’s playbook. "Coach has struggled getting the younger customer," says Corinna Freedman, retail analyst with Wedbush Securities. "We see other companies, such as Michael Kors, stealing some of its market share with more-fashionable brands."

Sales of belts, purses, shoes and shades have been on fire over the past several years, as recession-scarred consumers turned to accessories as luxuries they could afford. Manufacturers responded by adding to or beefing up their lines, creating heated competition in the high-end accessory market, a segment that Coach has long dominated.

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Analysts see plenty of potential for all three stocks for years to come. Freedman is especially keen on Kors, which makes chic casual clothing for men and women, as well as watches, shoes and jewelry. Watches were particularly hot during the holiday season. But Kors's designer clothing, jeans, T-shirts and leather jackets are also helping fuel double-digit profit growth. And its handbags have an avid fan base among young "aspirational" buyers—those not yet considered affluent but well-heeled enough to spend $375 for a purse. (Kors is based in Hong Kong, but its corporate offices are in New York City, and more than two-thirds of its stores are in North America.)

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Kors shares have been in style, too. Since going public in December 2011, the stock has soared 133%. At $58, it sells for 24 times projected earnings of $2.45 per share for the year that ends March 2014. That's a relative bargain for a company that analysts see generating earnings growth of more than 30% annually over the next three to five years.

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Ralph Lauren has been a force in high-end fashion threads for more than 40 years. But Ralph Lauren Corp. recently launched a luxury accessory line that makes Coach products seem downright affordable. With handbags, for instance, retailing for up to $22,500, the brand is aimed at the truly rich, not the merely affluent. But the New York City–based fashion house also offers more-affordable clothing and accessories under its Polo and Chaps labels. UBS analyst Michael Binetti believes the combination of super-chic and more moderately priced fare will lead to big earnings gains in the fiscal year that ends in March 2014.

Sizzling stock. Lauren shares have more than quintupled since February 2009 and are near their all-time high. At $177, they sell for 19 times estimated earnings of $9.35 per share for the March 2014 year. Analysts expect earnings to grow at a 13% pace for the next several years.

Shares of Coach, which tumbled in January after the company reported tepid results for the October–December quarter, are a better value. To be sure, Coach has lost some market share. But Morningstar analyst Paul Swinand says that product quality makes Coach a powerful contender for consumer dollars. At $49, or 12 times estimated earnings of $4.15 per share for the June 2014 fiscal year, he thinks investors are drastically underestimating the brand's popularity and the stock's ability to stage a comeback.

Coach, also based in New York City, recently named Victor Luis president, making him heir apparent to the company's top slot. Luis was previously in charge of Coach's international operations, suggesting that the company is serious about pushing the brand overseas, where Coach has only a modest presence today.

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