Are luxury buyers on a long-term strike, or have they just taken a sick day? That’s the question facing investors in companies like Coach (COH $30), Saks (SKS $15), and Tiffany (TIF $39).

The president of Unity Marketing, Pamela Danziger, has been addressing the topic rather alarmingly, reporting in January that her company’s Luxury Consumption Index had dropped to a historic low by the beginning of 2008, toppling conventional wisdom about the resistance of the high end to an economic downdraft.

“We know these are purchases that are 100%, totally, absolutely discretionary,” Ms. Danziger says. “People are inclined to spend on these products when they are feeling flush. The credit crisis, the sagging stock market — it’s all about feelings. Affluent consumers have everything. We think it’s going to get tougher and tougher for luxury brands. Baby boomers have been on a shopping spree for the past 20 years; they can sit out a month or two.”

An experienced buyer of discounted merchandise, Larry Coats, says he disagrees. He is bucking the trend by picking up some marked-down stock in Tiffany. He figures that with a great brand selling for 13 or 14 times next year’s earnings, he can live with a couple of uncertain quarters.

Mr. Coats is the president and CEO of Oak Value Capital Management and co-manager of the Oak Value Fund (OAKVX). He considers himself a long-term investor and value player, but he approaches periods of market turmoil as opportunities to diversify the fund’s traditional value holdings.

He began buying Tiffany in the fourth quarter as the stock came under pressure. Concerns about the faltering consumer and, more specifically, uncertainty among high-end buyers knocked the stock down, attracting Mr. Coats’s interest.

Mr. Coats is not alone. Though the stock is off 20% over the past six months, it has rallied from its low of $33 on January 14. Speculation has circulated about possible strategic buyers, such as the luxury goods maker LVMH, taking advantage of the slump in the share price and the weak dollar to extend their portfolios of brands. Moreover, activist Nelson Peltz owns roughly 5% of the shares, injecting further excitement into the mix.

Stacey Widlitz, who follows the company for Pali Research, rates the stock a buy. In a note to investors, she reported disappointment in the company’s holiday showing; worldwide sales for stores open for the entire year were up 1%, reflecting a 2% downturn in American same-store sales and a rise of 5% in international results. In Japan, still a huge market for Tiffany, sales fell 5%, while other Asian markets grew by 24%. Nonetheless, Ms. Widlitz says she is confidant that tighter expense controls and a shift toward higher-margin jewelry will boost margins and help the company achieve its forecast earnings of $2.25 to $2.28 for this year (revised slightly downward from $2.25 to $2.30).

Mr. Coats has bought Tiffany three times in the past 10 years. In 1998, during another market slump, he bought 6% of the company’s shares. The stock during that period of his ownership went from less than $10 to more than $40. At that time, the Asian currency crisis had slammed the market, leading to concern that fast-rising Japanese sales would drop. “I do not consider this just another cyclical luxury company,” he says. “This is one of the great brands.”

Mr. Coats is not just infatuated with the enduring potential of that little blue box. He also lauds management for having invested wisely in infrastructure in recent years, leading to greater vertical integration and above-average margins.

“Gross margins of mainstream retail jewelers are about 50%– 53%, while Tiffany’s are typically in the high 50s or approaching 60%,” he says.

One of the results of Tiffany’s integration move is less vulnerability to the ups and downs of metals prices. “For mid-level big jewelry chains, gold is about 6% of total cost of goods. For Tiffany, it’s significantly less,” Mr. Coats says. At the same time, the company is buying most of its diamonds direct from the mines, further improving its cost ratios.

Interesting current initiatives at Tiffany include the company’s recently concluded ventures with Patek Philippe and with the world’s largest watchmaker, Swatch. Compared to most jewelers, sales of Tiffany-brand watches are a small percent of revenues. In part, this shortfall is because the company has not offered rival brands in its stores, and also because Tiffany watches are available only through its own stores. “People comparison shop for timepieces,” Mr. Coats says. “They can’t do that with Tiffany watches.”

In an effort to solve the first problem, the company has announced that it will enter into the joint venture with Patek Philippe, one of the world’s most exclusive brands, on a salon in its New York flagship store.

At the same time, the new arrangement with Swatch will result in Tiffany watches being sold by other retailers, as well as allow for more efficient manufacturing, taking advantage of Swatch’s great volume. It will also permit more aggressive marketing. The risk, of course, is that some shoppers might balk at paying Tiffany prices for a Swatch product. Mr. Coats says this is not an issue, as Swatch is well-known for producing quality brands, such as Omega, and it supplies watch components to most of the major watch companies in the world.

Most followers think that Tiffany has plenty of room to grow internationally, especially in fast-developing countries like China and India. These nations have rapidly growing middle classes that, fortunately, pine to spend their newfound wealth on such symbols of success. In terms of the Chinese population, the 300 million now designated as middle-income in China appears tiny, but the reality is that the figure tops our own middle class and is certainly expanding more rapidly.

The risk is that Tiffany may lose its cachet. Ms. Danziger does not see that happening, though the company has clearly broadened its market by selling silver jewelry and other mid-price merchandise. “It still tops our quarterly survey of brands,” she says.

What is the company worth? Ms. Widlitz has a target price of $58, based on a multiple of 21.8 times her fiscal 2009 (ending January 31) estimate of $2.65. That puts her on the high side of analysts’ forecasts.

But really, what is that little blue box worth? Some would say … priceless.

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