Good Makeup Can't Cover Up a Bad Opportunity

One of the surest ways to do badly in stocks is chasing shares that have risen to well above average valuations compared with where they typically trade. From elevated P/Es, even the greatest companies often face months, or even years, of less than acceptable share price returns. The 3-month chart below shows how Walmart , Microsoft and Apple fared after recently reporting excellent quarterly numbers. High-end makeup company Estee Lauder is a top-quality name that was commanding a historically excessive valuation just ahead of its first quarter 2021 report. Shares, which fetched north of $318 in late April, at 51.6-times expected fiscal 2021 EPS, plunged briefly to south of $287 after mixed results. That almost 10% decline drew a host of viewpoints from analysts. Morgan Stanley went to bat for it, urging investors to hang tough or buy more. Wells Fargo put EL into its brand new signature picks portfolio. Was the pullback a buying opportunity? Let's see what EL is really worth. Estee Lauder is never cheaply valued. From 2011 through 2019, the stock averaged 25.8-times earnings, accompanied by around 1.22% in current yield. At its April 29 all-time, high those numbers were extremely stretched, at 51.6-times an already raised fiscal 2021 earnings per share estimate along with a puny 0.67% yield. At EL's Tuesday close of $302.11, EL still sold for 49-times this year's estimate and just a 0.7% dividend. Since 2011, there were plenty of chance to own EL at between 21-times and 23-times earnings. Why be the chump who pays more than double the valuation in effect when smarter buyers were going long EL? A simple regression-to-the-mean valuation, based on fiscal 2022 estimates (ends Jun. 30, 2022) suggests a price target of less than $190 by then. That would be quite painful for buyers at today's quote. Following Wall Street advice is very hard. The graphic below shows how conflicted the recommendations can be, even from the same source. As of Tuesday, Value Line listed EL as a No. 1 ranked, best buy for near-term stock price performance. At the same time it projected a decline to $278 over the coming 18-months. Does that make any sense? Value Line's 2024 to 2026 projections are even more confusing in light of its No. 1 buy rating. Value Line's long-term projected price range for EL runs from $185 to $250 indicating negative total returns over the next half-decade, even as EPS rise from about $6 to around $8.50. Are you confused enough yet? Wait, there's more. Yahoo Finance called EL overvalued at $302.11, yet listed its 12-month target price at $323.14, about 7% above where it sat currently. Not in my world. Quantitatively oriented Morningstar wisely sees EL as a 2-star, out of 5, sell. It calls present-day, as opposed to year-ahead, fair value as just $249. That view is internally consistent, but still assumes EL is worth over 40-times fiscal 2021 EPS. Research service FastGraphs justifiably shows EL as grossly overpriced. It uses a higher than average, 27.3-times P/E as a reasonably sustainable valuation for EL. Based on that it still projects a 12-month goal price of just $191.03 for this fine company's shares. There appears to be very little evidence to support a higher stock price over the next few years and a high probability for a minor or major stock price decline. Don't be the sucker that jumps in now thinking a small retracement from very overpriced represents a good entry point. If you don't own EL avoid it. If you are lucky enough to hold EL consider locking in gains while it's still pricey. (AAPL, MSFT, WMT and EL are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)

Good Makeup Can't Cover Up a Bad Opportunity

EL is a good example of why you shouldn't be the sucker who pays more than everybody else.

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