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Investors are gambling on the Watches of Switzerland share price: here’s what I’d do

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Viewing the Watches of Switzerland (LSE: WOSG) share price this morning was like watching a Harrier Jump Jet take off. By 10am, the stock was up over 23% and the line on the stock price graph was almost vertical!

This went along with the high-end watch retailer releasing positive news about the business. Its full-year revenues are expected to be at least £40m higher than previously thought, and earnings (EBITDA) up by 1.5%.

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However, we’re only 23 weeks into the firm’s financial year. And as we’ve seen recently, a lot can happen in the remaining 29 weeks. Further economic shutdowns can change a trading environment considerably, especially for cyclical stocks like WOSG. Nonetheless, it’s good news for the company and its shareholders who are optimistic about the firm’s prospects. But is a little positive news a good reason to become a shareholder now? 

In short, I don’t think so. Buying WOSG stock at its current price is gambling with your money.

The WOSG share price

The stock is currently trading around 403p and on price-to-earnings ratio (P/E) of about 2,020. This P/E ratio even exceeds Tesla‘s highest-ever P/E ratio of 1,152. Curiously, both stocks are currently trading around a similar level of pricing too.

However, as a young tech stock, you’d expect Tesla to have a relatively high P/E ratio. The company is not yet profitable and the optimism apparent in its share price should, in theory, reflect the growth expectations of the company as it tries to redefine how we live.        

As a seller of watches and jewellery, WOSG is in a completely different situation. Its plans for growth currently focus mainly on bricks and mortar, although it has also been growing its online offerings. This is likely due to the type of luxury goods it sells where the shopping experience and branding is a large part of the sale. Purchasing a Patek Phillipe from a plush store while being fawned over by a refined but eager sales assistant is a far cry from buying a mass-produced watch from an online retailer to arrive in the post on a later date.

With the physical high-end shopping experience, revenues per sale may be much higher, but so are the overheads. This adds friction to the future growth rate of the FTSE 250 retailer and I can’t see how the growth rate of the firm can be anywhere near that of Tesla’s.  Quite frankly, even if WOSG’s earnings more than double, as Goldman Sachs expects them to do, the P/E is still too high to provide a satisfactory return on my money.

What I’d do

There are many excellent FTSE-listed companies out there selling at far more sensible P/E ratios and that may also provide dividend income, improving my total investment returns. 

If I already owned Watches of Switzerland shares, I’d be selling them and cashing in on those returns. As I don’t, I won’t be buying, at least not until the stock returns to a more sensible price. Until then, there are far better options for investment returns out there for smart investors.

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Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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