The 'lipstick indicator' is flashing bright green right now. Here are 3 stocks to capitalize on this overlooked signal

The 'lipstick indicator' is flashing bright green right now. Here are 3 stocks to capitalize on this overlooked signal
The 'lipstick indicator' is flashing bright green right now. Here are 3 stocks to capitalize on this overlooked signal

Although prices of everyday essentials have been edging upwards, don’t expect Americans to cut back on their skincare routines and makeup hauls — even during a recession.

In fact, consumers often spend more on small, affordable luxuries, such as cosmetics, during poor economic times. The “lipstick index” is often attributed to Leonard Lauder, one of the billionaire heirs to The Estée Lauder Companies, who pointed to increasing sales of lipsticks during the 2001 recession.

This is a trend that could be possibly resurfacing, as prestige beauty and fragrance sectors boomed last year. With fewer folks masking up, lipstick sales saw a boost of 37% in October compared to the previous year, market research firm NPD Group told The Wall Street Journal — lip products sales were also up compared to pre-pandemic levels.

“At times when discretionary income is scarce and splurging on expensive non-essential goods is not an option, buying lipstick could be a way of escapism,” wrote Natallia Bambiza, director and beauty analyst at NPD Group, in a blog post.

And more than one-quarter of Americans plan on spending more money on their appearance in 2023 than they did in 2022, according to a national survey from Chicago-based dermatology practice Advanced Dermatology.

Although economists are forecasting an upcoming recession, cosmetics could be one spending category that consumers aren’t willing to sacrifice on — making them a unique bet for investors to capitalize on this year.

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Ulta Beauty (ULTA)

This beauty chain offers makeup, skincare and bath products under its own private label, along with hundreds of other brands — from prestige lines like Elizabeth Arden to more affordable cosmetics such as e.l.f.

Ulta’s third quarter report indicated double digit earnings growth for skincare, fragrance and bath, hair care and makeup, with net sales jumping 17.2% to $2.3 billion.

“While it's hard to know with certainty if we are starting to see consumers trade down, as the only beauty retailer that offers a wide variety of price points from entry-level mass to high-end luxury and everything in between, Ulta Beauty is uniquely positioned to capture any consumer shifts within price points in the beauty category,” said CEO Dave Kimbell in an earnings call.

Simeon Gutman from Morgan Stanley has a “hold” rating on Ulta Beauty, with a price target of $510 — or 3% higher than what shares are trading at today.

Coty, Inc. (COTY)

Coty doesn’t just own affordable drugstore brands like CoverGirl and Sally Hansen — it also has licensing agreements with luxury lines like Hugo Boss and stakes in companies such as Kylie Cosmetics.

The beauty behemoth notably snapped up 41 Procter & Gamble brands back in 2016 for $12.5 billion.

“Beauty as a category remains resilient, at the sweet spot of being a staple in consumers' beauty routines, and a category of offer, where the innovative products and communications we bring to market directly drive demand,” said CEO Sue Nabi in an earnings call.

Coty reported its like-for-like revenues grew 9% in the first quarter for 2023.

Piper Sandler recently raised its rating on Coty from “neutral” to “overweight”, setting a target price of $10. That’s a potential upside of about 7%, seeing as shares are currently trading at around $9.35.

The Estée Lauder Companies (EL)

The luxury cosmetics giant has been around for over 75 years — and boasts everything from anti-aging serums to long-lasting foundations. It also owns popular brands such as MAC, Clinique and Too Faced.

“Fragrance and hair care each rose double digits organically, and makeup’s renaissance continued to realize its promise in markets reopening,” said CEO and president Fabrizio Freda in the first quarter earnings report for 2023.

Despite net sales declining in the company’s first quarter compared to the same period the previous year — in part due to COVID-19 restrictions in China — analysts remain optimistic.

Oppenheimer analysts have an “outperform” rating on Estée Lauder and recently upped its price target from $245 to $300. With shares trading at around $259.51 today, that’s roughly 20% higher.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.