Stock Picks for Chicks: This Lipstick Stock Clashes With Your Portfolio

There's an old saying that in ugly economic times, lipstick sales go through the roof. It makes sense: A new shade of lipstick is an affordable -- and easy-to-justify -- splurge. So what better time than now to pretty up your portfolio with beauty-industry stocks?

Hold on a second! Back away from the cosmetics counter, investors. Pick the wrong shade of stock, and your portfolio could end up looking like the bottom of our makeup bags -- littered with a bunch of pretty shades of shadows, lip stains and powders that proved unflattering after we got them home.

Pay attention, guys. You're on our turf now.

Ding dong! Anyone home?
Our male counterparts can be forgiven for their misguided cosmetic industry purchases … to a point. We're here to set the record straight about a beauty company that guy investors seem to be gushing over.

When was the last time you thought about the Avon Lady? Exactly. But somehow, Wall Street didn't get that memo.

Avon Products (NYSE: AVP  ) shares recently enjoyed major trading interest, thanks to rumors that L'Oreal might acquire it. That speculation implies a lot more positivity than we can muster. So far, the rumor has failed to translate into reality, and Avon's business outlook keeps looking worse.

When we started looking at Avon, we really, really wanted to like the company. Like PepsiCo (NYSE: PEP  ) , which we highlighted here on Stock Picks for Chicks, Avon has a female CEO. But girl-power loyalty only goes so far.

Pepsi's got a well-known female CEO and a lot of impressive long-term growth plans. Avon, not so much. The company continues to struggle this year after a weak 2009, and it recently announced plans to cut 400 jobs. Although a major part of Avon's issue is a slowdown in the U.S. market, a good chunk of its troubles surely owe to its loss of brand luster in the U.S. We'd argue that Avon is retro in a bad way.

Many investors seem to boast about the huge chunk (80%) of Avon's revenue that's generated abroad, but we're less excited. Regulatory and currency translation issues are no walk in the park for investors, and growth concerns in China, Brazil, and Russia bode ill for the company. (Since Brazil and Russia together make up 25% of Avon's revenue, so those worries are hardly skin deep.) Plus, there's always the risk that the same lack of trendiness now plaguing Avon at home will eventually settle in abroad as well.

Blemishes on Avon's business model
The company may tout its direct-selling distribution channel (comprised of 6.2 million active representatives, according to the latest 10-K), but we see that as a major red flag. Think about it: Its direct selling distribution channel is effectively its only distribution channel. Having all its eyeliners in one cosmetic bag is the kind of major risk that should send chills down any discriminating investor's spine.

Its direct-selling focus means that Avon competes for women's time and inclination to participate in these types of selling events. After all, rival Mary Kay, Berkshire Hathaway's (NYSE: BRK-B  ) Pampered Chef, and Tupperware (NYSE: TUP  ) all rely on the same type of in-home experience to peddle their wares.

And plenty of competitors crowd front of shoppers wherever they go -- cosmetics rivals like Estee Lauder (NYSE: EL  ) , Revlon (NYSE: REV  ) , L'Oreal, and retailers that sell cosmetics (like drugstores and department stores), not to mention pure plays like Sephora and Ulta (Nasdaq: ULTA  ) .

Lipstick, pigs, and ugly portfolios
Avon's had various turnaround plans in the works since late 2005, and it's expected to be done implementing them all by 2012-2013. However, whether you call it a restructuring plan or a makeover, there's a point where there's no way to put lipstick on a pig. Investors would do well to seriously question whether Avon can generate adequate sales growth over the long haul.

We believe the Avon brand's best days are well behind it. Investors who take the chance on this wallflower could end up with ugly blots in their portfolios. This company could use a radical change, but pulling it off sounds like a long shot in a real world full of formidable competition.

That said, we do believe strongly in making a makeup play for our portfolios. Next week in Stock Picks for Chicks, we'll put on our faces and reveal a cosmetic-related stock that's far more attractive for investors' portfolios.

Berkshire Hathaway is a Motley Fool Inside Value selection. Berkshire Hathaway is a Motley Fool Stock Advisor pick. PepsiCo is a Motley Fool Income Investor recommendation. The Fool has created a covered strangle position on Tupperware Brands. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Berkshire Hathaway.

Alyce Lomax and Dayana Yochim do not own shares of any of the companies mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 18, 2010, at 8:42 PM, ikkyu2 wrote:

    I hope this series isn't going to be all about lady-related stocks; you guys are smart.

  • Report this Comment On November 19, 2010, at 8:49 AM, penchy1 wrote:

    I love this series! Dana and Alice are fun and informative. A good start for further research.

    Keep on doing it!

    Mark, a guy.

  • Report this Comment On November 19, 2010, at 8:50 AM, penchy1 wrote:

    OOPs! Dayana, sorry for getting your name wrong.

  • Report this Comment On November 19, 2010, at 9:33 AM, lemoneater wrote:

    For some Avon nostalgia watch Edward Scissorhands:).

    My company's policy about no solicitation from outside vendors doesn't appear to apply to Avon. The sales booklets are conveniently located by a coffee machine. I haven't needed to go to a party for years. I wonder if Avon appeals to the younger demographic--girls in their teens and early twenties.

    However, when I order. I like the convenience of ordering direct from Avon's website. I rarely have cash and I don't carry a checkbook. I'd be curious to know what percentage of sales they generate from their internet store.

    My sister-in-law has had some success selling Avon in Edinburgh, Scotland. I think she is somewhat of a novelty in her neighborhood with no other competing Avon ladies. Also I don't think Mary Kay has a presence there. Cosmetics didn't appear to be a big business in that city. While I greatly enjoyed my time in Edinburgh, I didn't get the impression that it was a major fashion center. I wonder how Avon's international sales are.

    ikkyu2. Avon isn't just a lady-related stock. Those in the know realize that Avon sells an amazing bug repellant called "skin so soft." Take it on your next hike, you won't be sorry!

  • Report this Comment On November 19, 2010, at 11:05 AM, TMFLomax wrote:

    Thanks for the thoughts and compliments everyone! lemoneater, thank you for your insights on this stock. I haven't heard a peep about it in my regular life for ages, but of course, that doesn't mean it's not out there and that's interesting about the info in the office environments. It absolutely has to branch out through things like that, since really, times have changed so much since its heyday. Also interesting about Edinburgh, and yeah, maybe Mary Kay's not there, which would explain a lot too! International revenues do make up the majority of their sales. (Glad you mentioned skin so soft too -- it almost got mentioned in the article! Definitely interesting it had an unexpected cross-purpose!)

    ikkyu2, we are going to cover whatever stocks strike us, but with a female perspective. I was thinking we should look into Smith & Wesson (great props - "lock and load!") -- ha, kidding. :)

    Best,

    Alyce

  • Report this Comment On November 19, 2010, at 1:53 PM, lemoneater wrote:

    Smith and Wesson did have a line of handguns for women called the Ladysmith. No joke! I hope common sense and wit will be all the weapon I ever need.

    I will be interested to watch your video on which cosmetic company you think is a good investment.

  • Report this Comment On November 19, 2010, at 2:42 PM, rustedroot wrote:

    Hi Ladies

    While you're video was entertaining and had some relevant points, it missed a good bunch. True, sales are stagnant in the US and brisk overseas which are exposed to currency risk but your comments about the dist channel are not quite 100%. You undercut the directselling model by linking it to parties or a knock on the door. That view is retro. Most sales are done online now and parties are rare. Reps abroad are using smartphones to manage all their business. Quite advanced. I will give you that the core of who Avon is centers on the personal relationship b/n the rep and customer. That's what sets Avon apart from mass retailers and other direct sellers.

    As for image, have you seen all the advertising, the Avon Foundation work and the Mark brand aimed at college women? These are so not retro.

    So please dig a bit deeper since you have power and along with that comes responsibility. Now I'm getting all Yoda on ya.

    By the way, I'm a dude, an Avon rep and I just threw my first Avon party. Very fun. Now that's radical.

    Also, keep an eye out for the Hugh Jackman comedy to be shot in 2011 called "Avon Man".

    Cheers

  • Report this Comment On November 19, 2010, at 4:45 PM, TMFLomax wrote:

    lemoneater, thanks for the tip about the Ladysmith. Perfect! Haha! (And thanks for mentioning "Edward Scissorhands," too, one of my favorite movies, and yeah, a nostalgic representation!)

    rustedroot, wow. You do sound radical! :) Thanks for the informative feedback! We love discussion here and getting that kind of detailed defense of Avon (and pointing out that we might not have it *quite* right in our impressions) is good for fellow (gender-neutral, haha) investors to hear as well as they weigh this stock. Thanks for chiming in with your knowledge on the company!

    Alyce

  • Report this Comment On November 19, 2010, at 8:03 PM, vgaymer wrote:

    I like this series. I don't know why anyone would have issues with it. It appears to focus on a particular segment of the investment/business world that could generate all sorts of interesting perspectives from female CEOs to consumer goods targetted towards females, and I personally find it no more offensive(although I'm a guy) than focusing on particular market sectors or, say, emerging markets.

    I was wondering, along these lines, if you've looked at IPAR. What I've seen and remembered about it, it looks promising: large insider ownership, growing revenues with a large chunk coming from foreign markets, dividend with respectable(but not enormous) yield but one that is growing, reasonable debt levels. I'm sure they face some competition, though offhand i'm not sure who the players are(I don't wear perfume;)). Admittedly, I haven't delved too deeply into it; I've owned some in the past but not now.

    Anyway sorry for the rambling;

    Cheers,

    G

  • Report this Comment On November 21, 2010, at 10:22 AM, TMFLomax wrote:

    vgaymer,

    Thanks so much, and that wasn't rambling at all! Totally agreed that this can go in many different directions given a little different perspective. (I think some people aren't too wild about the word "chicks"...)

    I haven't looked at IPAR, but I will put it on my list of stocks to check out! It sounds interesting!

    Best, Alyce

  • Report this Comment On November 21, 2010, at 6:19 PM, Zaneyjaney wrote:

    I'm not too wild about the use of the word "chicks" either. But I got past it, and enjoyed reading your article. Am in full agreement too about the state of Avon, at least from what I've seen in the areas I've lived.

    Looking forward to your rec next week!

  • Report this Comment On November 23, 2010, at 4:29 PM, TMFLomax wrote:

    Thanks Zaneyjaney -- I'm glad to hear we were able to convince you to get past the chick-word! And thanks for adding in what you've observed about Avon!

    Best, Alyce

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