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Are Beauty Stocks Really Recession-Proof, or Even Recession-Resistant?
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The problem with listening to market commentators instead of doing your own research is that there are differences in the way people read data (and explain it). And these differences are not given adequate consideration when you’re going blind.
So some analysts consider cosmetics recession-proof because people curb more expensive things like travel and spend instead on beauty and cosmetics during recessions. Therefore, cosmetics sales and profits are relatively steady during a recession. But if you think about it, how likely are you to spend on beauty products that you may not need when there are concerns about your job security (or you may not have a job in the first place)? Also, when the chances of your making more money from the markets are affected, how likely are you to spend more on your face?
As the following chart displays very well, the cosmetics and toiletries market has not been recession-proof in the last 25 years. In fact, in each of the two economic recessions during this time and the pandemic-induced blip in 2020, prices have declined more sharply in this industry than the S&P 500 benchmark. The good news is that they’ve also bounced back more sharply on the way out.
25-Year Price Chart
Image Source: Zacks Investment Research
As far as valuations are concerned, the industry has always traded at a premium to the S&P 500, dropping to an almost in-line valuation during recessions, as the following chart shows:
25-Year Valuation Chart
Image Source: Zacks Investment Research
While investors appear to be piling into what looks like a bottom (see Chart 1 above), it’s worth considering the valuation as well. Chart 2 clearly shows that when valuations are elevated going into a recession, they come down sharply until they’re almost level with the S&P.
Currently the industry is trading at a nearly 78% premium to the S&P 500 (forward 12 months P/E basis). This seems to indicate significant near-term paring of the valuation until maybe the middle of next year (depending on when we actually see a recession). When the broader market starts recovering, these stocks will bounce back faster.
Therefore, if you’re planning to enter the market about now, you should be prepared to take some pummeling before things get better. And in that case, it may be a good idea to get some stocks that are seeing positive estimate revisions, represented by the Zacks #1 (Strong Buy) rank. It also helps if analysts are optimistic about their growth prospects going into what promises to be a tumultuous year. Check out these three #1 ranked stocks:
New York-based Inter Parfums manufactures and markets a range of fragrances and fragrance-related products through department stores, specialty stores, perfumeries, domestic and international wholesalers and distributors within the U.S. and abroad.
The company has topped analyst estimates in three of the last four quarters at an average rate of 27.8%. Analysts have raised their 2022 and 2023 earnings estimates by a respective 14 cents (4.3%) and 23 cents (6.6%) in the last 30 days.
They now expect 2022 revenue and earnings to grow 16.6% and 23.6%, respectively. In 2023, revenue is expected to grow 8.6% and earnings 9.0%.
Operating through the Taste, Nutrition & Health and Scent & Care segments, Holzminden, Germany-based Symrise AG offers fragrances, flavorings, cosmetic active ingredients and raw materials, and functional ingredients. It caters to food and beverage manufacturers, pet and aqua food manufacturers, as well as manufacturers of perfumes, personal care and cosmetic products, cleaning products, detergents, air fresheners, and oral care products.
The surprise history is not available, but analysts have raised the company’s earnings estimates by a couple of cents each for 2022 and 2023. Revenues are currently expected to increase 16.4% this year and 8.8% in the next. Earnings are expected to grow 6.3% and 11.0%, respectively.
Oakland, CA-based e.l.f. Beauty offers cosmetic and skin care products under the e.l.f. Cosmetics, e.l.f. Skin, Well People and Keys Soulcare brand names worldwide.
The company has topped analyst estimates in each of the last four quarters at an average rate of 92.8%. Estimates for the year ending in March 2023 are up a couple of cents in the last 30 days. The 2024 estimate hasn’t changed during this time.
Revenues are currently expected to grow a respective 24.5% and 11.5% in 2023 and 2024. Earnings growth is also expected to be solid at 33.3% for 2023 and 8.8% for 2024.
Price Performance YTD
Image Source: Zacks Investment Research
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Are Beauty Stocks Really Recession-Proof, or Even Recession-Resistant?
The problem with listening to market commentators instead of doing your own research is that there are differences in the way people read data (and explain it). And these differences are not given adequate consideration when you’re going blind.
So some analysts consider cosmetics recession-proof because people curb more expensive things like travel and spend instead on beauty and cosmetics during recessions. Therefore, cosmetics sales and profits are relatively steady during a recession. But if you think about it, how likely are you to spend on beauty products that you may not need when there are concerns about your job security (or you may not have a job in the first place)? Also, when the chances of your making more money from the markets are affected, how likely are you to spend more on your face?
As the following chart displays very well, the cosmetics and toiletries market has not been recession-proof in the last 25 years. In fact, in each of the two economic recessions during this time and the pandemic-induced blip in 2020, prices have declined more sharply in this industry than the S&P 500 benchmark. The good news is that they’ve also bounced back more sharply on the way out.
25-Year Price Chart
Image Source: Zacks Investment Research
As far as valuations are concerned, the industry has always traded at a premium to the S&P 500, dropping to an almost in-line valuation during recessions, as the following chart shows:
25-Year Valuation Chart
Image Source: Zacks Investment Research
While investors appear to be piling into what looks like a bottom (see Chart 1 above), it’s worth considering the valuation as well. Chart 2 clearly shows that when valuations are elevated going into a recession, they come down sharply until they’re almost level with the S&P.
Currently the industry is trading at a nearly 78% premium to the S&P 500 (forward 12 months P/E basis). This seems to indicate significant near-term paring of the valuation until maybe the middle of next year (depending on when we actually see a recession). When the broader market starts recovering, these stocks will bounce back faster.
Therefore, if you’re planning to enter the market about now, you should be prepared to take some pummeling before things get better. And in that case, it may be a good idea to get some stocks that are seeing positive estimate revisions, represented by the Zacks #1 (Strong Buy) rank. It also helps if analysts are optimistic about their growth prospects going into what promises to be a tumultuous year. Check out these three #1 ranked stocks:
Inter Parfums, Inc. (IPAR - Free Report)
New York-based Inter Parfums manufactures and markets a range of fragrances and fragrance-related products through department stores, specialty stores, perfumeries, domestic and international wholesalers and distributors within the U.S. and abroad.
The company has topped analyst estimates in three of the last four quarters at an average rate of 27.8%. Analysts have raised their 2022 and 2023 earnings estimates by a respective 14 cents (4.3%) and 23 cents (6.6%) in the last 30 days.
They now expect 2022 revenue and earnings to grow 16.6% and 23.6%, respectively. In 2023, revenue is expected to grow 8.6% and earnings 9.0%.
Symrise AG (SYIEY - Free Report)
Operating through the Taste, Nutrition & Health and Scent & Care segments, Holzminden, Germany-based Symrise AG offers fragrances, flavorings, cosmetic active ingredients and raw materials, and functional ingredients. It caters to food and beverage manufacturers, pet and aqua food manufacturers, as well as manufacturers of perfumes, personal care and cosmetic products, cleaning products, detergents, air fresheners, and oral care products.
The surprise history is not available, but analysts have raised the company’s earnings estimates by a couple of cents each for 2022 and 2023. Revenues are currently expected to increase 16.4% this year and 8.8% in the next. Earnings are expected to grow 6.3% and 11.0%, respectively.
e.l.f. Beauty, Inc. (ELF - Free Report)
Oakland, CA-based e.l.f. Beauty offers cosmetic and skin care products under the e.l.f. Cosmetics, e.l.f. Skin, Well People and Keys Soulcare brand names worldwide.
The company has topped analyst estimates in each of the last four quarters at an average rate of 92.8%. Estimates for the year ending in March 2023 are up a couple of cents in the last 30 days. The 2024 estimate hasn’t changed during this time.
Revenues are currently expected to grow a respective 24.5% and 11.5% in 2023 and 2024. Earnings growth is also expected to be solid at 33.3% for 2023 and 8.8% for 2024.
Price Performance YTD
Image Source: Zacks Investment Research