Fossil watch © Fossil via Facebook

The timing seems excellent for Fossil stock.

Holiday sales of luxury goods will rise 7% worldwide versus a year ago, according to a Monday report from Bain & Company. Top performers will include leather goods, jewelry and watches.

That bodes well for Hong Kong-based Michael Kors (KORS), which sells all of these things and is enjoying blistering growth. Stock investors, however, should consider buying Fossil (FOSL) instead.  

Here's why: Michael Kors has trounced Wall Street's earnings forecasts each quarter since its December 2011 stock market debut, and its stock price has roughly doubled this year. Earnings per share during the company's current fiscal year, which runs through March 2013, are projected to surge 86% on a 51% jump in sales.

Shares are pricey, however. At around $54, they trade at 37 times the fiscal-year earnings projection, versus 16 times for the S&P Midcap 400 Index of medium-size U.S. companies.

All 10 of the analysts who cover Michael Kors stock recommend a purchase of it. Yet the company's founder sold half his stock and its chief executive sold two-thirds in the initial public offering and follow-on offerings over the past year.

Long-term forecasts are plenty bullish. They project Michael Kors reaching $4.4 billion in yearly sales by its fiscal year ending March 2017, according to FactSet data. That would make it nearly the same size as rival Coach (COH) today. By then, earnings per share will total $3.27 and growth will have slowed to 15% a year, the estimates show.

For Michael Kors shares to gain 10% a year between now and then, they would have to rise to about $79. That's 24 times what the company is expected to earn by then, even though its growth rate will be much slower.

If that seems optimistic, consider that eight years ago, Coach brought in roughly as much in sales as Michael Kors brings in today. So Michael Kors would have to generate as much growth over the next four years as Coach, itself a remarkable past performer, delivered over the past eight, just to meet expectations.

That's a lot to assume, especially in a business that's as difficult to predict as high fashion.  

Investors could always buy Coach shares instead. They trade at just 14 times earnings. The problem is that at the moment, Michael Kors is hot, Coach is not, and growth in the sector may not be strong enough for both companies to thrive in the short term.

After all, a closer look at Bain's forecast shows a clear slowdown. The 7% growth it expects in the fourth quarter is slower than the 10% it expects for the year. Last year, global luxury sales grew 11%. Also, currency swings have flattered growth of late. Without them, Bain reckons, luxury goods sales would rise just 5% this year (and presumably less during the fourth quarter), down from 13% in 2011.

The luxury goods sector is still faring better than many others, considering that sales for the broad Standard & Poor’s 500 Index ($INX) are projected to decline this quarter. But Coach during its most recent quarter reported that sales rose a meager 1.7% at long-standing North American stores.

Fossil may be a better bet for stock buyers. At about $85 a share, it trades at 16 times earnings, and sales are expected to increase 13% this year and next.

Unlike Coach, Fossil is cashing in on the blazing results at Michael Kors. In June, Citigroup calculated that Michael Kors watches, which Fossil makes, contributed 12% of Fossil's revenues. Fossil is also rolling out Michael Kors jewelry, which explains most of the 95% growth in Fossil's jewelry sales last quarter.

With Fossil shares, investors have an opportunity to ride the Michael Kors momentum in coming quarters while reducing potential losses if the brand falls out of favor. That seems a prudent balance of fashion and frugality.

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