With many American consumers in such difficult straits that stocks of dollar stores have soared, you'd think beauty products would be discretionary to the point of obscurity these days. However, that's not necessarily the case. Some beauty stocks have done remarkably well.
Checking back in at the beauty aisle
Back in late 2010, Dayana Yochim and I made some bold calls in our "Stock Picks with Chicks" video series. In the beauty section of the consumer goods sector, we highlighted Estee Lauder
We were being pretty contrarian at the time. Estee Lauder could have looked like an overvalued stock to many investors; its market cap was a surprisingly high $15 billion. On the other hand, Avon looked like a beaten-down value that many investors speculated could find an acquirer.
However, it looks like our female investing intuitions were spot-on. Investors who bought and held Estee Lauder in early December 2010 have enjoyed a 62% total return.
Our bearish call on Avon has also panned out. Avon never did find a suitor, a potential deal with Coty fell through, and the company's even had the Securities & Exchange Commission probing it due to international bribery allegations. The shares have now lost 45% of their value since November 2010.
As we said at the time, despite hard economic times, the old adage that women will always buy a lipstick even if they can't afford other discretionary and indulgent purchases to raise their spirits seems to hold up to the test of time. Incidentally, that so-called "lipstick indicator" was coined by former Estee Lauder chairman Leonard Lauder.
High-end brands like the ones Estee Lauder provides as well as beauty stores like Ulta
NPD Group has reported that in the U.S. alone, sales of high-end beauty products increased 11% to $9.5 billion last year.
Although Estee Lauder trades at 21 times forward earnings, it's been firing on all cylinders and is obviously giving even fickle shoppers small pick-me-ups and little indulgences without breaking the bank.
Although Estee Lauder trades at a premium to, say, rival Elizabeth Arden
As for Avon, I can find no indication that it's in any better shape than it was nearly two years ago. In the last 12 months, its revenue has dropped by 2.7%, and its profits are decelerating rapidly.
Sticking with the strong foundation
I currently have an "outperform" CAPScall on Estee Lauder and an "underperform" CAPScall on Avon in our community intelligence database, Motley Fool CAPS. You can see my track record here. It's tempting to take the positive points I've racked up on both CAPScalls and close out, but I've decided to stand pat. In my opinion, Estee Lauder's still a strong leader in the sector, and Avon's got far too many serious problems to reverse my opinion yet.
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