Glitter Nor Gloss Can Make This Stock Sparkle

High-end cosmetic producer Estee Lauder took a header on Tuesday, after reporting decent quarterly results, but simultaneously lowering guidance for 2022. Pre-market the shares sunk to new 52-week lows, south of $230, after peaking on Jan. 4 at north of $374. That's a big fall for anyone who bought at the top. It's not a good result for those who purchased one year ago, either. Could those people have known to avoid buying EL at those moments? Absolutely. Here is why that would have been possible. Every stock that's not a recent issue has a normalized set of metrics, based on years of prior trading. Estee Lauder's 2011 through 2019 price-to-earnings averaged 25.8-times, accompanied by around 1.22% in yield. One year ago Tuesday, EL's forward multiple was 49-times and its payout was just 0.70%. Those numbers represented the most expensive P/E and the worst current income in more than a full decade. At EL's April 29, 2021 all-time peak, the metrics were even worse. Who wants to be the sucker than pays a higher valuation for the same shares than others ponied up year after year? There were plenty of chances to own EL at from 21-times to 23-times earnings (green-starred below). Simply regressing to its own normalized valuation suggested risk down to about $185 over the coming year last spring. You couldn't count on research from Value Line to save you from a bad buying opportunity. In a strange, but not unusual, way Value Line rated Estee Lauder as a top-ranked best buy for year-ahead performance. To be fair, EL did go on to carve out the all-time high mentioned earlier. That didn't last long, though. While EL was a best buy, Value Line was saying that EL would be lower 18-months later. It also indicated a 2024 - 2026 projected price range of from $185 to $250. How could it tell people to buy near $300 when it believed EL would be significantly lower over the next few years? Value Line's three to five year numbers for EL were calculated when the shares fetched $293.95 rather than the $302.11 quote when its review was actually published. Total returns would have been even worse from the higher starting price. Saner, quantitatively oriented, services did much better than Value Line's momentum-based advice. Morningstar rated EL a 2-star, out of 5, sell. It called its May 4, 2021 fair value as $249 per share, 17.6% below where it was already trading. FastGraphs' chart showed how crazily overpriced Estee Lauder was at $318.34. It assigned a higher than recent average P/E of 27.28-times to its year ahead EPS estimate to come up with a $191.03 fair value for EL. Even a 27.3 multiple on EL's current year EPS projection of $7.57 would only support about $207 by Dec. 31. Reverting back to it actual average multiple suggests a drop to around $195 is more likely by year's end. What are the key takeaways from all this? Nobody can truly predict near-term share price action. Overpriced stocks can get even pricier in frothy market conditions. Reversions to the mean take time, typically from six to 18 months, but almost always end up taking place. Avoid being the chump who pays inflated valuations even for the very best companies. Take advantage of company-specific and general market pullbacks to establish positions in stocks you like when they sell for lower than normal valuations. Allow for reasonable time horizons to play out before declaring yourself wrong. Over my 44-years of trading, my initial price targets have been met more than 80% of the time. Quantitative analysis trumps momentum-based trading most of the time. Estee Lauder is still too expensive. Buy its high-quality make-up but not the shares.

Glitter Nor Gloss Can Make This Stock Sparkle

Estee Lauder is a lesson in how stocks move to their true values over time.

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