Art Market Watch:

Sotheby’s stock is nothing if not volatile -- but for a while, it seemed like the only direction was up. Since the recession hit in 2008, Sotheby’s watched its stock rise in fits and starts from less than $10 a share to a high of $54 at the end of March 2011. The run-up paralleled the rising optimism in the high-end art business, and seemed to peak in anticipation of the firm’s big Impressionist, modern and contemporary art sales scheduled for May 2011.

In a report dated Apr. 1, 2011 -- presumably it wasn’t a joke -- TheStreet Ratings upgraded Sotheby’s from “hold” to “buy,” noting that the auction firm had a “rather high” gross profit margin of almost 64 percent and strong earnings growth of almost 27 percent. Sotheby’s stock had “surged” by almost 70 percent over the last year, TheStreet pointed out, outperforming the S&P 500 Index.  

The thinking behind the bizarre recommendation -- the stock is at a record high, it must be time to buy some -- seemed like a comic echo of art auction bidders at the very top end, whose apparently anti-intuitive strategy is to buy when the price is high and rising, rather than when prices are low. In the rarefied world of art masterpieces, values only go up -- they never come down.

This notion was questioned only a few days later by Atlantic magazine business editor Derek Thompson in an article titled, The Art of Bubbles: How Sotheby’s Predicts the World Economy. Citing Vikram Mansharamani’s book Boombustology, which had then been out for about a month, he suggested that “periods of record bidding are scarily accurate bubble predictors,” since they reflect “overconfidence and hubris,” not to say the flamboyant display of easy money by the unsophisticated newly rich.

Then came Sotheby’s New York sales in May, which, as anyone who follows the headlines knows, fell dramatically short of expectations. Sotheby’s totaled $170.5 million in its Impressionist and modern art sale on May 3, 2011, and $128 million in its contemporary art sale on May 10, 2011. Bloomberg art-market correspondent Katya Kazakina reported today that disappointing spring sales in Hong Kong also contributed to the decline.

Sotheby’s stock promptly fell more than 20 percent, dropping to about $40 before bouncing back a dollar or two in recent days. TheStreet Ratings then reversed itself, and downgraded the shares from “buy” to “hold.” This time around, despite “robust revenue growth” and an “impressive record of earnings per share growth,” TheStreet targeted “weak overall” cash flow from operations.

Despite Sotheby’s difficulties, the art market seems to be in recovery mode, especially at the top end: Christie’s New York evening contemporary sale on May 11, 2011, totaled $301 million, near its pre-recession record of $348 million in May 2008.

Does that make Sotheby's stock a buy? According to art consultant Todd Levin, the answer to that question is "no." Levin suggested the stock would stay down, or perhaps decline a bit more, especially following the June auctions as the art world enters its "post-Basel doldrums," referring to the Art Basel art fair, which this year takes place June 15-19, 2011.

After Labor Day, as collectors begin to anticipate the coming fall sales, the stock is liable to rise again -- only to drop right before the auctions. "It's the historical pattern," Levin said, noting that the time to take profits is before the big sales. "I've been trading the stock that way a long time."

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