The Bold and the Beautiful

 | Jul 11, 2013 | 2:00 PM EDT
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Juan Ponce de León was famous for searching for the fountain of youth, but today millions of folks are searching for their own fountain. Whether youth is found via surgery, mineral hot springs, vitamins or cosmetics, we live in a culture that prizes youth, or at least a youthful appearance. One major purveyor of products for those who want to look better, younger or more desirable is Estée Lauder Cos. (EL), maker and marketer of such skin care, fragrance and hair care products as Clinique, Aramis, Aveda, La Mer and, of course, the eponymous Estée Lauder brand.

Since Fabrizio Freda came on as CEO four years ago, the company has undergone its own youthful rejuvenation. At the time, the market was just starting to climb out of its nadir. Estée Lauder's stock was down to about $11 and was in the upper teens when Freda took over. But if we go back to 2006 and 2007, when the market was still strong, the stock was resting in the low to mid $20s. The market has, of course, recovered from the Great Meltdown, but Estée Lauder is galloping along like a thoroughbred young enough to be just finding its racing legs. Today's Estée Lauder is trading in the upper $60s.

That's an impressive run-up for any CEO, and it was not accomplished with blush and eyeliner. The company's financial and operational performances have improved, and the market is responding. Revenue went from $7.3 billion when Freda took over to today's $10 billion or so, while earnings per share are up more than fourfold in the same period.

Peter Lynch was a great mutual fund manager who wrote about his investment strategy in his best-selling book, One Up on Wall Street. Years ago, I took his strategy and computerized it in a way that allows me to analyze any stock using his technique (I did this with about a dozen of the great investors).

My Lynch-based strategy thinks Estée Lauder is very pretty. The most important variable used by this strategy is the P/E/G ratio (P/E relative to growth, a way of calculating how much the investor is paying for growth given today's stock price). A P/E/G of up to 1.0 is acceptable, and Estée Lauder comes in below this maximum threshold with a P/E/G of 0.93. Also in the company's favor is its ability to manage inventories well. If you want a high-end consumer products company in your portfolio, you would be hard pressed to find a better choice than Estée Lauder.

While Estée Lauder caters to the well-to-do crowd, Unilever (UL) has mass appeal. Its brands are as varied as Dove, Lipton, Vaseline, Hellmann's, Ben & Jerry's and Pond's. Based in the U.K. and the Netherlands, Unilever is a strong choice if you want a mass marketer in your portfolio.

My James P. O'Shaughnessy-based strategy is a fan of Unilever. It likes the company's huge market cap ($119 billion), strong cash flow per share, large number of outstanding shares (2.9 billion) and massive sales ($67 billion). The strategy takes those companies that pass these benchmarks and selects 50 based on dividend yield. With a 3.4% yield, Unilever makes it into this very elite group.

Estée Lauder and Unilever are at opposite ends of the consumer products spectrum in terms of product pricing, but should be in the bull's-eye of those who want to invest in top-tier companies.

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