Cosmetic retail firm Ulta Beauty (NASDAQ:ULTA) recently delivered quite the shocker when its CEO said that beauty demand was slowing “a bit earlier and a bit bigger than we thought.” Undoubtedly, the commentary sent shares of ULTA nosediving by around 15%. At writing, ULTA stock has shed more than a quarter of its value from its peak levels. The Ultra guidance warning shockwave swept through the broader beauty industry, with some high-flying beauty stocks also taking sizeable hits to the chin, falling in sympathy with the $20 billion beauty titan.
Undoubtedly, some of the beauty stocks have enjoyed sizeable runs in recent years, and with that, it’s hard not to imagine the expectations bar creeping higher. With such extended valuations amid the market rally, it’s not a mystery why Ulta’s perception of the industry has weighed so heavily on the broader basket of beauty plays.
The big question is whether a shift in industry trends is solely to blame or if Ulta is being bettered by its rivals. Let’s check in on three beauty stocks that may be worth buying on the dip.
e.l.f. Beauty (ELF)
e.l.f. Beauty (NASDAQ:ELF) has been the most exciting beauty stock to hang onto in recent years. Even after the latest 25% spill, ELF stock is still up 64% over the past year and over 500% in the past two years. Of course, there have been occasional scares en route to higher levels. Last August, the stock lost a third of its value before recovering in record time to hit new highs.
Even as the beauty industry stalls, there’s no doubt that e.l.f. Beauty has been a colossal market share taker, and the company can continue gaining share. Even as the cosmetics market hits a few road bumps, I’d argue, e.l.f. Beauty may be in an even better spot to take more share as consumers seek to spend less.
The $8.7 billion cosmetics retailer offers competitive prices, decent quality, and, perhaps most importantly, a high degree of innovation. TD Cowen analysts remain upbeat on ELF stock amid recent turbulence, also remarking on the firm’s ability to innovate. I think they’re smart to stay bullish on the name.
L’Oréal (LRLCF)
L’Oréal (OTCMKTS:LRLCF) stock spiked higher following the release of some pretty impressive first-quarter earnings results. Most of its product categories saw impressive strength across the board. Most notably, the company’s Dermatological Beauty segment experiences almost 22% gains for the quarter. There seem to be few, if any, signs of beauty industry softness, according to L’Oréal thus far.
Personally, I think the recent weakness from Ulta is more of a company-specific matter than an industry one. Either way, I expect the broader basket of beauty stocks could grow L’Oréal’s fantastic number as they rise from oversold conditions.
As for LRLCF stock itself, it’s less than 7% from all-time highs, which may very well be reached following its applaud-worthy numbers, which, I believe, should act as a breath of fresh air for the broader cosmetics industry.
Coty (COTY)
Finally, we have Coty (NYSE:COTY), which I view as one of the best value options for the beauty market, with shares currently trading at 19.6 times forward price-to-earnings. Apart from the modest multiple, Coty has been praised by several big-name analysts in recent weeks.
TD Cowen upgraded its rating on COTY stock to outperform with a 23% price target hike. As a part of the upgrade, analysts pointed to the firm’s fragrance business as a “robust category in the U.S.”
Undoubtedly, the luxury fragrance market has been a big mood booster during the pandemic and now through rampant inflation. Many young consumers, like those in the Gen Z cohort, view fragrances as another means of expressing their unique personalities with signature scents (or even sizeable fragrance collections). Further, widely followed social-media influencers within the scent community, like Jeremy Fragrance, have been an absolute boon to the smell-good industry.
On the date of publication, Joey Frenette did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
