Estee Lauder (NYSE:EL) investors have had a good 2018 so far and I believe EL stock is likely to continue its run up in this last quarter of the year, too. Specifically, there are three bullish plays in EL stock that I want to share with you, as each play could lead to impressive profits.
Estee Lauder, the parent of luxury cosmetics and fragrance brands, including MAC, Origins, Jo Malone London, Bobbi Brown and Clinique, operates within the cosmetics industry. Within the industry, Estee Lauder faces competition from Avon Products (NYSE:AVP), Coty (NYSE:COTY), Helen of Troy (NASDAQ:HELE), Inter Parfum (NASDAQ:IPAR) and Nu Skin Enterprises (NYSE:NUS).
Year-to-date, Estee Lauder shares are up over 7.5% mostly due to consistent strong financial results and pro-active management aiming for growth in all segments, including skincare, makeup, fragrance and hair care. For the past two years, Estee Lauder has also implemented the Leading Beauty Forward initiative with the aim of cutting costs and making operations more efficient. Indeed EL stock has been a great performer over the past decade, and shares have gone up almost 25% over the past 12 months.
Most cosmetics companies, including Estee Lauder, have been hit by the decline of brick-and-mortar department stores in the U.S. where historically bulk of the sales have come from. Yet EL, which has been a global leader in design and marketing of prestige beauty products, has managed to expand its sales overseas, mostly in China where cosmetics and the skin-care market grew about 12% in 2017. Estee Lauder stock has also benefitted from “travel-retail,” or duty-free shopping at airports, mostly thanks to increased air travel in the Far East.
On Aug. 20, Estee Lauder reported strong financial results across the board with a well-diversified portfolio of strong brands. Its management gave an optimistic outlook, citing its robust online and travel retail network. In August, EL also declared a regular quarterly dividend of 38 cents per share, payable on Sept. 17, to shareholders of record on Aug. 31, 2018. The next quarterly dividend declaration is expected in November with a dividend yield of around 1%.
The fierce competition, especially in China, as well as evolving consumer trends, may impact Estee Lauder stock’s high margins in the long run. However, I expect the EL stock to finish the year on a high note. Estee Lauder is expected to release its earnings on Oct. 31. I believe that a preemptive bullish move before the release of the earnings would be in order as the stock is likely to exhibit further strength in the near future.
Those investors who pay attention to moving averages should note that the technical message is a “buy,” while the oscillators are at overbought levels. Short-term support for EL is first at $135.6 and then at $132; meanwhile, short-term resistance in Estee Lauder stock is first at $139.80 and then at $142.
EL’s 52-week price range has been $108.25 (Oct. 20, 2017) — $ 158.80 (June 18, 2018). EL shares have now fallen four days in a row, giving a good entry point for investors. The fall was especially hard on Oct. 4 amid the broader selloff in the market. Therefore there might still be some volatility in the shares in the next few days. Depending on individual portfolio allocations and risk/return profiles, here are the three types of trades set up for EL stock. (Prices are based on Estee Lauder stock’s closing price of $137.14 on Oct. 4.)
Three Bullish Strategies on Estee Lauder Stock
- Buy 100 shares of Estee Lauder stock at a limit price of $137.14. You should expect to hold this long stock position for up to one to six months for an approximate 5%-7% gain. You may consider placing a stop loss at about 3% below your entry point.
- Use an in-the-money (ITM) covered call covered call, whereby you would buy 100 shares of Estee Lauder stock at a limit price of 137.14 and, at the same time, sell an EL Jan 2019 $135 call option, which currently trades at $8.65. The $135 option is slightly ITM, offering more downside protection in case of volatility and a decline in EL stock, especially around the earnings call.
This call option would stop trading on Jan. 18, 2019 and expire on Jan. 19.
Assuming you would enter this covered call trade at the closing prices on Thursday, at expiry, the maximum return would be $651 (i.e., ($8.65 – ($137.14-$135))*100), excluding trading commissions and costs.
An ITM covered call’s maximum profit is equal to the extrinsic value of the short call option. The trader realizes this gain as long as the price of EL stock at expiry remains above the strike price of the call option (i.e., $135).
At expiry, this trade would break even at an EL stock price of $128.49 (i.e., $135-$6.51) excluding trading commissions and costs.
A third option is to sell the Jan 2019 $135 put option with a limit price of $5.85 — its closing price on Oct. 4.
This put option would also stop trading on Jan. 18, 2019 and expire on Jan. 19.
Assuming you enter this put selling strategy at the closing prices it had on Wednesday, the upside is that you keep the premium as long as Estee Lauder stock closes above $135 when January options expire (excluding trading commissions and costs).
The downside is that if EL stock trades below $135 ahead of expiration, you could be assigned 100 shares for each sold put at the cost of $135 per share.
At expiry, this trade would break even at an EL stock price of $129.15 (i.e., $135-$5.85).
The Bottom Line on EL Stock
I believe the strength in Estee Lauder stock will continue in the last quarter of the year. As prudent investors, however, it is always crucial to maintain a clear risk-return profile. Thus, if the leg up does not happen, a move toward the high-$120s level could be the next leg down.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
