(MONEY Magazine) – After a spectacular run during the 1990s, luxury stocks have lost their luster. Two of the industry's premier names, Paris-based LVMH Moet Hennessy Louis Vuitton and Amsterdam-based Gucci Group, have been hit hard by fears of a worldwide recession. American Depositary Receipts for LVMH (LVMHY) are 47% off their high of $19, while those for Gucci (GUC) have dropped 34% to $79.

As soon as the global economy rebounds, however, investors in luxury stocks should be well rewarded. That's because over the long run, luxury products are gold--uh, make that platinum. The people who buy this stuff open their wallets early and often, and they are not looking for bargains. Unlike mid-range merchandisers, Gucci, LVMH and other high-end retailers compete based on status, exclusivity and glamour--they're all about brand. "If [luxury houses] competed on price, that would destroy the illusion that this is the best stuff money can buy," says analyst Dan Sherman of the Ivy International fund.

That mystique allows luxury-goods firms to enjoy fat gross margins of 60% or more, nearly double those of Gap and the Limited. As two of the industry's powerhouses, LVMH and Gucci should produce long-term earnings growth of at least 14% a year when good times return. Both look like deals now. But which is the better buy?

LVMH, although it doesn't have the buzz that Gucci has now, is the better long-term play. During the past 10 years, the core Vuitton division has grown revenues by 15% a year, on average, while maintaining its profit margins.

LVMH's expansive portfolio of brands also offers significant diversification. The $24.5 billion behemoth has beefed up its fashion lines with such acquisitions as Givenchy and Pucci (it is also in the process of buying Donna Karan). The company also owns stakes in Fendi, Michael Kors and its rival Gucci. It's a major force in wines and spirits, boasting top names--including Dom Perignon, Hennessy cognac and Moet & Chandon--which contribute 37% of LVMH's operating profits. In 1997 the company bought the Sephora cosmetics chain, whose sales popped 37% in the first half of 2001. "LVMH has shown itself to be [skilled] at taking brands that are struggling, getting control of distribution, doing the right type of marketing and building them up," says Ivy's Sherman.

True, this year has been tough for LVMH. Champagne sales fizzled, owing to a millennium surplus. The duty-free business--lvmh owns shops in airports and major cities--was sapped by the paucity of Japanese tourists. All in all, analysts predict that earnings will shrink 15% this year.

But those problems should be short-lived. Fashion and cosmetics sales have remained solid, posting 18% and 15% growth, respectively, in the first half of the year. And the company's recent resolution to focus on developing its existing brands should help next year's earnings, which analyst Joelle Benhamida of Swiss investment bank Pictet expects to jump at least 15% to 20% when the economy turns. "We've nurtured the most important brands for today," says LVMH group managing director Myron Ullman, "but also fueled the ones that will be stars tomorrow."

At a price/earnings ratio of 27.8, LVMH is slightly more costly than Gucci, but rightfully so, given its strength and reach. The company historically trades at a 60% premium to the average P/E of the S&P 500. After the recent drop in LVMH's stock price, the spread has been cut to 37%. "LVMH, over a long period, probably has more upside than Gucci," says Sherman. "lvmh will keep rolling along."

As much as we give better odds to lvmh, we'd hardly count Gucci out. In the mid-1990s Gucci CEO Domenico De Sole and creative director Tom Ford transformed a once-beleaguered brand into one of the hottest labels in fashion. Earnings soared more than 20% a year from 1995 to 1999, leaving the company flush with cash--now around $3 billion--and nearly debt-free. During the same period, the stock rose a stellar 169% vs. 134% for the S&P 500. But these days Gucci shares are under a couple of clouds.

First, Gucci is embroiled in a dispute with LVMH over a 1999 investment in Gucci by French conglomerate Pinault-Printemps-Redoute. LVMH contends that the alliance, which diluted its stake from 34% to 20%, violates Dutch law. Amsterdam courts have ordered an investigation into the matter. "We don't have great visibility on how the litigation will be resolved," says Standard & Poor's equity analyst Tom Graves.

Second, the company has made some high-stakes investments in an attempt to transform itself into a multibrand empire. Since late 1999 Gucci has committed more than $1 billion to purchase established labels like Yves Saint Laurent and to align itself with hot young designers like ex-Chloe star Stella McCartney (yes, Sir Paul's daughter).

These acquisitions can be expected to drain the company's earnings for some time. YSL, for one, is bleeding money, losing an estimated $75 million this year--$25 million more than expected. Some analysts, including Dana Telsey of Bear Stearns (see The Insana Interview, page 61) are confident that Gucci can revitalize YSL, ultimately providing a big boost to the bottom line. But the turnaround will take a while.

--ADRIENNE CARTER