Nov. 11 (Bloomberg) -- Hermes International SCA, the family-controlled French maker of Birkin handbags, may keep rising while other luxury stocks fall as so-called short sellers buy back borrowed shares, analysts at Exane BNP Paribas wrote.

The Paris-based company is also the top candidate to join France's CAC 40 index, and ``this could crystallize a short squeeze'' amid forced buying by index funds, the analysts wrote.

Hermes is the only member of the Bloomberg European Fashion Index to rise this year. It jumped 5.7 percent today, even as an executive at larger rival LVMH Moet Hennessy Louis Vuitton SA said a consumer slowdown may hurt sales, sending luxury stocks tumbling across Europe. A short squeeze occurs when investors who had sold borrowed stock, aiming to profit from a decline, are forced to buy back shares in a hurry.

``Technical factors seem to explain Hermes' recent price behavior,'' Exane analysts including Christophe Wakim and Francoise Paumard said in a report distributed today. ``Technical pressure, which would exceed seven trading days, could drive the share to new highs.''

About 8.2 percent of Hermes' outstanding shares have been borrowed, according to Data Explorers in London, while Hermes says some 72 percent of its stock is family-owned. In a short sale, speculators borrow stock and sell the shares, hoping to buy them back at a lower price and pocket the difference.

Short squeezes linked to hedge-fund redemptions and the collapse of Lehman Brothers Holdings Inc. have sent several stocks soaring in recent months, most notably Volkswagen AG.

Index Decision

The German automaker's shares more than quadrupled over two days in October, briefly making it the biggest company by market value in the world, after controlling shareholder Porsche SE disclosed derivative positions aimed at increasing its stake.

Hermes, whose Kelly bags cost at least 4,000 euros ($5,050), rose 5.78 euros to 107.08 euros, the highest in a month. LVMH, the biggest luxury company, slid 11 percent today and is down 47 percent in 2008.

A committee may revise the CAC 40's membership in November or December, Exane's Wakim and Paumard added. Index funds must buy Hermes stock to match the CAC 40's weighting if it joins.

Index compilers have likely overestimated the amount of Hermes stock that trades freely and is available for purchase, Exane wrote, potentially driving the stock much higher in the event of forced purchases.

`Disconnected Fundamentals'

Exane, which says the current stock price is ``disconnected from fundamentals,'' has a price estimate of 73 euros, more than a quarter below the shares' current value.

Hermes has resisted past downturns better than some rivals because its products are so expensive that they appeal only to the wealthiest, most recession-resistant shoppers. Some short- sellers may have bet the outperformance of Hermes' shares still wasn't justified. The company reported slowing third-quarter sales growth last week and missed analysts' estimates.

Luxury companies face their first sales drop in a decade next year, Bain & Co. said last month, as financial-market turmoil hurt demand for higher-priced consumer goods.

The family that controls Hermes is ``passionately attached'' to the company, Chairman Jerome Guerrand, a descendant of founder Thierry Hermes, told investors in June. Speculation the family would nevertheless sell the company to a larger rival has recurred over the past years.

To contact the reporters on this story: Alexis Xydias in London at axydias@bloomberg.net; Thomas Mulier in Geneva at tmulier@bloomberg.net.

Last Updated: November 11, 2008 11:47 EST