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Shuffle Your Portfolio: Buy or Avoid These Cosmetics Stocks

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The consumer staples sector has been in investors' good graces of late, buoyed by an improving economy, strong labor market and continued hiring, improved GDP numbers as well as a resurgent housing market. These factors hint on rising consumer confidence in the months ahead and suggest that the economy is in good health.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, also plays a major role in the upward revision. It grew 3.3% in the second quarter, compared with the government’s earlier estimate of 1.9%.

Though Hurricanes Harvey and Irma storms along with North Korea’s back-to-back nuclear tests on Japan have spurred global tensions and unnerved investors, we believe these short-term headwinds can be overlooked as we can see signs of continuing strength in consumer confidence, which in turn will lead to higher consumer spending and fuel growth in the near term.

The increase in consumer spending has also triggered growth in the cosmetics industry, particularly in the luxury arena and in makeup. Apart from buying essential and non-durable goods ranging from everyday grocery, food items, beverages, tobacco and other household essentials, consumers started spending on beauty and personal care products, on top of larger purchases such as apparel and footwear and personal accessories.

The rise of e-commerce and social media has further aided the fastest-growing beauty channels. In fact, per media sources, the U.S. beauty sector is expected to reach $90 billion by 2020, and the majority of the growth will come from premium beauty products and services.

How Is the Cosmetics Industry Placed?

We note that the Zacks Cosmetics industry is currently placed at top 31% out of the 265 Zacks Industries. The industry has also been outperforming the S&P 500 market lately. In the last six months, the industry recorded around 10.1% growth, well above the S&P 500 Index’s growth of 5.4%. However, it carries a Zacks Sector Rank of #7 (out of 16), placing it at the top 44% of the Zacks Classified sectors.

That’s why it may be a good idea to invest in cosmetics stocks at this juncture, as signs of surging consumer confidence and economic recovery is making the industry attractive. Despite of industry gaining momentum, there are still some stocks in the cosmetics market that have been delivering sluggish results and are expected to continue to remain weak in the near term.

Given this backdrop, investors may want to reshuffle their portfolio and include those cosmetics stocks which have been doing well for quite some time and have the potential to deliver returns in the coming months. Also, investors should consider avoiding those cosmetics stocks, which are not capable of delivering desired returns.

How to Pick Viable Stocks?

We have narrowed down our search to the following two stocks based on their Zacks Rank #1 (Strong Buy) or #2 (Buy). These stocks also have positive estimates revision and their share prices are trending higher than the industry as well as broader sector’s average.

2 Prominent Picks

The Estée Lauder Companies Inc. (EL - Free Report)

Estée Lauder is a leading global manufacturer of skin care, makeup, fragrance and hair care products. The stock has been on growth trajectory backed by a diverse portfolio, well-planned acquisitions and notable progress in e-commerce.

These attributes have aided this Zacks Rank #1 (Strong Buy) company’s earnings to surpass the Zacks Consensus Estimate for 12 straight quarters. The stock currently has a long-term growth rate of 12.2% and has a beta rating of 0.67, which means the stock is also less volatile than the market average.

Evidently, shares of the company have surged 27.4% in the last six months, outperforming the industry’s growth of 10.1% as well as the broader Consumer Staples sector’s improvement of 2.9%. In fact, shares of the company have gone up almost 11.6% since it posted upbeat fourth-quarter fiscal 2017 results on Aug 18. The Zacks Consensus Estimates have also gone up 2.6% and 1.6%, respectively, for fiscal 2018 and fiscal 2019 over the last 30 days.

Nu Skin Enterprises Inc. (NUS - Free Report)

Another Zacks Rank #2 stock is Nu Skin Enterprises, which is engaged in the development and distribution of consumer products, offering beauty and wellness solutions under its Nu Skin personal care, Pharmanex nutrition brand and ageLOC anti-aging category brands in over 50 markets worldwide. The Provo, UT-based firm has a VGM Score of A and has a long-term growth rate of 8.7%.

On Aug 2, the company posted second-quarter fiscal 2017 results, wherein both earnings and sales surpassed the Zacks Consensus Estimate. In fact, the company’s earnings have surpassed the Zacks Consensus Estimate in four out of last six quarters, with in-line results in one.

Moving forward, this skin care and nutritional products retailer remains focused on boosting its customers and sales. Nu Skin also plans to launch ageLOC LumiSpa product in the fourth quarter of this year, which is expected to generate roughly $100 million in revenues. Further, for fiscal 2017, management raised its guidance for earnings which is now projected in the band of $3.2-$3.3 per share. The Zacks Consensus Estimates have also gone up 4.2% and 2.1%, respectively, for 2017 and 2018 over the last 60 days.

Evidently, shares of the company have surged around 17% in the last six months, outperforming the industry’s growth of 10.1% as well as the broader Consumer Staples sector’s improvement of 2.9%. In fact, shares of the company have gone up almost 11.6% since it posted upbeat fourth-quarter fiscal 2017 results on Aug 18. The Zacks Consensus Estimates have also gone up 2.6% and 1.6%, respectively, for fiscal 2018 and fiscal 2019 over the last 30 days.

2 Stocks to Avoid

The below mentioned stocks from the industry have been underperforming since past many quarters and have also witnessed decline in share price in comparison to the industry as well as the broader sector. We suggest avoiding these stocks, which also carry Zacks Rank #4 (Sell) or 5 (Strong Sell), possess a negative surprise trend and have witnessed downward estimate revisions.

Coty, Inc. (COTY - Free Report) at the moment is not a valuable stock. Based in New York, Coty presently carries a Zacks Rank #4 (Sell) and a VGM Score of D. The Zacks Consensus Estimates have significantly declined 24.2% and 15%, respectively, for fiscal 2018 and fiscal 2019 over the last 30 days.

This manufacturer and global marketer of beauty products has posted negative earnings surprise in three out of the trailing four quarters, making an average negative surprise of 27.65%. This signals that the company has been witnessing headwinds in the near term, which have pulled down the shares over the last six months period. The stock has declined 13.1% in the last six months, as against the industry’s growth of 10.1% as well as the broader sector’s gain of 2.9%.

We note that sluggishness in the consumer beauty segment, increasing competitive pressure, and changing consumer preferences have been the major deterrents for the company. In fact, declines in the retail nail, color cosmetics and hair color categories in the United States and mass fragrance in Western Europe and the United States are expected to continue to impact business. The company also remains exposed to unfavorable foreign currency translations as it has a considerable international presence.

Another stock which is underperforming is Avon Products Inc. (AVP - Free Report) , which currently holds a Zacks Rank #5 (Strong Sell). This global direct-selling beauty company offers cosmetics, fragrances, toiletries, jewelry and accessories and has reported negative earnings surprise of 150% in second-quarter 2017, which were negatively impacted by strong comparisons with the prior-year quarter.

Also, weak Active Representatives growth has been denting the results over the past few quarters. The company has lagged earnings estimates for four consecutive quarters, with an average miss of 90.7%. Additionally, the Zacks Consensus Estimate for 2017 has declined 55% in the last 60 days and around 23% for 2018.

Moreover, the stock nosedived 43.9% in the last six months, as against the industry’s growth of 10.1% as well as the broader sector’s improvement of 2.1%. In fact, the company has lost around 24% since it reported dismal earnings on Aug 3.

Bottom Line

An intelligent selection of stocks greatly benefits investors and the abovementioned stocks can prove to be valuable additions to your portfolio.

You can also use the Zacks Stock Screener to find other stocks with this winning combination. Your search ends at stocks with a favorable Zacks Rank of either #1 or #2, which encompasses its strong fundamentals, promises price movement and highlights analysts’ constructive view on the same via positive estimate revisions. As we know, a sturdy portfolio always gives favorable returns.

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