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Calling All Aspiring Cosmeticians (EL)

Posted on May 3, 2021

We begin with the following mantra –

“Make-up, hair spray, skin cream, smells!”

Repeat.

Remember also to focus equally on the physical and character deficiencies of your customer.

And never forget stock price; buy it, willy-nilly, with all your extra earnings.

If you’re rich, it doesn’t matter how you look.

The stock under consideration today is none other than Estee Lauder (NYSE:EL), makers of lipstick and blush – but with a stock market cap of $115 billion!

Now, we’re not opposed to women dolling up – in fact, we rather enjoy seeing the Mrs. in her haut couture best.

But when the purveyors of powders, polishes and parfums start pretending they’re Microsoft, well… we feel a fella’s gotta put his foot down.

Companies with values that size belong exclusively to the tech realm, in our chauvinistic opinion.  And, as you know, eye-shadow and lip-gloss happen to be among the least technical items on sale anywhere.

Have a look now at some fundamental numbers.

  • To begin, Estee Lauder’s P/E is a very rouge 125.57(!),
  • Her Dividend Yield is 0.68%, and
  • Her Price to Book ratio is a rather chubby 21.02.
  • Moreover, earnings this year declined by a smudged-up 61.40%, and
  • Insiders offloaded 81.40% of their holdings in the last six months!  That amounted, by the way, to a $1.2 billion hairdo.  (You read that right – billion.)

When the insiders recognize the stock is starting to behave like TESLA, and they act on it, you know something is up.

Have a look at the chart –

Technically, we’re looking at a stock with less than stellar indications –

  1. RSI is turning lower, though it was never overbought (in green), and
  2. MACD has started its roll lower.
  3. Price has tightened into a steep, five-week channel (in blue) after a one-year, 130% gain, and
  4. Has now broken below the lower edge of that channel (expanded, in orange).
  5. The next test lower will be the bottom edge of the one-year channel, in red (280/290).
  6. Beyond that, we see a decline to the 250 range, where a large gap that needs filling (in purple) aligns with a simple Fibonacci retracement calculation (in black).

Earnings for the company will be posted at the open today, so we have a potentially explosive move already in the making.

And with that in mind, we’re acting as follows –

A Jew and His Money recommends you consider selling the EL October 16th 360 CALL (now 15% OTM) for $5.30, and using those funds to buy the EL October 16th 250 PUT for $4.70.  Total credit on the trade is $0.60.  Set a STOP buy on the shares at 360.

Rationale: with the short CALL more than paying for the long PUT, we feel comfortable with the price of entry.

At the same time, the short CALL is 15% above the current stock price, which we believe is not realistically attainable over the intermediate term.

We’ll very likely close the trade as the decline fattens up the PUT’s value and diminishes that of the CALL.

Maximum gain on the trade is unlimited.

Maximum loss – with proper STOPs in place – is NIL.

Remember to maintain an open STOP at 360 until the trade is closed.  If the initial STOP buy is triggered, immediately set a STOP sell.  Should that STOP be activated, reset a new STOP buy.  This will maintain a zero net loss on the trade.

With kind regards,

Hugh L. O’Haynew

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