2023-09-06 06:00:00 ET
Summary
- e.l.f. Beauty is a top-rated stock with strong momentum and value indicators.
- The company has experienced impressive earnings growth and outperformed the S&P 500.
- Consensus analyst projections suggest significant upside potential for the stock in the next five years.
I have been watching a stock over the last several months that just keeps moving higher and higher.
The stock is currently ranked #33 out of a total of 5,884 stocks, ETFs, and mutual funds in my database, and it continues to move higher. How is my overall ranking calculated?
My proprietary ranking is based on a blend of momentum (performance) and value with a few secret herbs and spices thrown in along the way. Like any algorithm however, it still takes some human touch and logic to interpret the numbers.
For Instance, knowing something about the story that underlies the numbers is vital. e.l.f. Beauty (ELF)-$136.97 was formed in 2004 but did not go public until September of 2016. It went public at $25.00 per share. The company manufactures and markets skin care products and cosmetics under the e.l.f. brand name.
The Oakland, CA-based company boasts about their products being 100% "cruelty-free" and they support PETA's no fur campaign. Their products are sold in 17 countries including Target, Walmart, and Dollar General. Their annual sales will approach a dollar amount of about one billion this year and their market cap is now $7.5B.
Their earnings have been growing by an average of 20% per year over the last 5 years, but they have been accelerating recently. In the most recent quarter, their sales grew by a whopping 76% and their earnings by an incredible 182%. One of the rules that I have lived by as an analyst and professional money manager over the last 24 years is that "stocks and indexes" follow earnings!
Has this terrific earnings growth translated into stock price appreciation? Let's take a look:
This current chart of e.l.f. is one of the best charts in the market right now. Let's have a look at how its performance stacks up against the S&P 500 (alpha).
Over the last five years, the stock has delivered an average return of 62.2% per year vs. an 11.1% average annual return for the S&P 500. As you can see from the numbers above, its 3-year and 1-year returns have been even more remarkable. It easily earns a relative momentum (short-term) grade of A+ when compared with the other 5,883 in my database. In the IBD's MarketSmith system, it earns a momentum score of 99 on a scale of 1-99.
The stock needs a ten-year average return to earn an overall performance grade. This grade takes into account the one, three, five, and ten-year relative performance of the stock vs. the rest of the database. e.l.f. does not have a ten-year record.
Also, note from the screenshot above, the annual returns between 2019 and 2023. It is pretty easy to come to the conclusion that this has been and still is one of the best-performing stocks in the entire market.
But performance is all about the past, what about the future? Many investors are wary of buying into a stock that is hitting new all-time highs, and rightly so. But this is where valuation comes in. Performance looks to the past while valuation projects the future.
I have found during my career in the industry that it is best to look at both momentum and value, as opposed to joining sides with either the inclusive "momentum" or "value" camps, which basically ignore each other.
So, now that we have taken a look at the last five years, let's take a look at what the next five years could look like. For this I use consensus analyst's projections for earnings growth, keeping in mind that the company is constantly guiding them with their internal projections.
The company is expected to generate $2.46 per share in earnings this year and $2.73 per share next year. In addition to this, the consensus annual expected average earnings growth rate over the next five years is 20% per year. When I extrapolate those expected earnings out to 2027 and apply a multiple ((PE)) ratio that I think is appropriate for a fast-growing stock in this industry, I come up with a 5-year target price of $252.88 per share.
The stock is currently trading at $138.71.
This gives the stock 82.3% upside potential. I require a minimum of 75% in order to consider the stock for purchase. Not only does the stock pass my performance (alpha) test, but it also passes my valuation test. I also like the fact that it has a defensive nature to it. Consumer staples like this can hold up better than consumer discretionary stocks during times of duress.
Now for the final criteria that put me over the top in deciding to purchase this stock in my Ultra-Growth Portfolio.
I asked my wife of 23 years, who knows a thing or two about make-up. You should see her drawers and boxes of it that easily add up to more fishing paraphernalia that I have accumulated over the years.
Her answer was: "I like their products; they are good quality and cheap!"
Bam!
What are the risks involved?
As always, the overall economy could slow down. This hurts consumers. We have not had a real earnings recession since 2008. It is inevitable that we will have one at some point in the future.
Competition is always a risk. There are some very big players in this industry like Estee Lauder ( EL ) that e.l.f. is up against.
Inflation has not left the global landscape yet. It is still stubbornly hanging around. This could create margin pressure on a small company like e.l.f.
Despite all of this, it is one of my favorite small-cap growth stories in the market today.
For further details see:
e.l.f. Beauty: A Beauty Of A Growth Stock That Continues To Deliver Alpha