By arguably most factors, cosmetics stalwart Estée Lauder (NYSE:EL) appears to flirt with trouble. With high inflation continuing to pose challenges for the consumer economy, a discretionary play like Estée Lauder seems treacherous. However, institutional options flow suggests that the company could be a high-risk contrarian buy. Therefore, I am cautiously bullish on EL stock.
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EL Stock Falls amid Mixed Signals
To be completely upfront, no one should confuse EL stock with a comfortable pickup. Since the start of the year, shares plunged by around 40%. Despite mixed signals from Estée Lauder’s fiscal fourth quarter, investors decisively took the axe to EL.
Late last week, TipRanks reporter Shrilekha Pethe stated that the cosmetics specialist posted adjusted earnings per share of 7 cents. While this figure represented a 75% year-over-year implosion on a constant-currency basis, it exceeded Wall Street’s expectations, which called for a loss of 4 cents per share. In addition, Estée Lauder rang up $3.61 billion in sales, up 1% year-over-year, beating the consensus target of $3.48 billion.
“We returned to organic sales growth in the fourth quarter, delivering our outlook. Momentum continued in the markets of EMEA and Latin America and accelerated strongly in Asia/Pacific led by mainland China and Hong Kong SAR,” mentioned in part Fabrizio Freda, Estée Lauder’s President and CEO.
Unfortunately, it wasn’t enough, with EL stock falling sharply on the disclosure. While management guided EPS to land between $3.50 and $3.75 for Fiscal Year 2024, the consensus anticipated EPS of $4.88.
In addition, the broader circumstances in the consumer economy don’t help. True, the latest retail sales figures shows that people are still opening their wallets, thus boosting discretionary retailers. However, even they don’t believe the good times will last. With Americans racking up over $1 trillion in credit card debt, investors are trimming exposure to retail enterprises.
Contrarian Institutions to the (Possible) Rescue
While the backdrop for EL stock is admittedly ugly, some institutional traders apparently see a contrarian upside opportunity. To be sure, it’s a risky form of speculation. Still, it may make some investors pause for a moment.
For instance, looking at TipRanks’ options chain for derivatives expiring on September 15, 2023, the net change in open interest for out-of-money (OTM) calls – that is, contracts featuring a strike price from $150 to $175 – came out to 329 contracts. On the other hand, open interest for OTM puts – contracts with strike prices from $125 to $145 – landed at 166 contracts.
So, even among all trades for the September 15 expiry options – which include both retail and institutional demand – traders appear to be speculating that EL will recover (and perhaps soon). However, data focusing on big block trades likely made by institutional investors raise the most eyebrows.
Specifically, on August 18, traders bought $200 calls with an expiration date of October 20, 2023. Further, this trade – which printed volume of 1,051 contracts against open interest of 1,635 – occurred as part of a multi-sweep transaction. Such a transaction refers to orders occurring across several exchanges.
Conspicuously, the move is an aggressive one, which requires EL stock to move up by nearly 31% by October 20. Nevertheless, it’s not entirely impossible.
Fundamentals Might Save the Trade
Frankly, one of the fundamental reasons why EL stock suffered since late 2021 – besides common headwinds such as inflation – is the post-pandemic work paradigm. With millions of white-collar employees still operating remotely, the incentive to look presentable diminishes considerably. However, if this framework changes, Estée Lauder may flatter the contrarians.
Over the past year or so, an increasing number of companies have mandated a return to the office, usually under a hybrid schedule. One such company implementing this mandate is, ironically enough, Zoom Video Communications (NASDAQ:ZM). If a key facilitator of remote work is itself requiring a pivot back to the office for certain staff members, this development can easily gain momentum.
That’s not to say EL stock isn’t speculative because it absolutely is. It’s just that there may be a method to the madness.
Is Estée Lauder Stock a Buy, According to Analysts?
Turning to Wall Street, EL stock has a Moderate Buy consensus rating based on 16 Buys, seven Holds, and zero Sell ratings. The average EL stock price target is $192.27, implying 25.8% upside potential.
The Takeaway: Even the Big Dogs Gamble, Which Could Help EL Stock
By practically any sound measure, cosmetics giant Estée Lauder appears risky. While it’s doing some things right, the wider consumer economy imposes anxiety. Still, some institutional traders believe EL stock could be a contrarian opportunity. What’s more, the fundamentals might even support this long-shot thesis.
