The Market is Flashing a ‘Buy’ Sign on Estee Lauder (EL) Stock

Investors don’t need much excuse to avoid cosmetics brand Estee Lauder (EL) stock. Over the past 52 weeks, the share price has declined by around 40%. Nevertheless, technical analysis indicators suggest that the market is flashing a Buy sign for the beleaguered enterprise. From a speculative standpoint, I am bullish on EL stock.

Attractive Entry Point

Yes, it’s true that Estee Lauder hasn’t been a paragon of financial growth or even stability. In the third quarter of 2023, the beauty brand posted revenue of $3.52 billion. Fast forward one year later and sales dipped 4.55% to $3.36 billion. During this time, free cash flow became more negative, from $703 million in the hole to $811 underwater.

However, it’s also important to point out the obvious: comeback candidates don’t announce themselves. If they did, guess what? It’s no longer a compelling opportunity. Admittedly, EL stock is wildly speculative. Still, if you’re looking for that extra kick, Estee Lauder should be on your radar. It offers an attractive entry point at current levels.

Technical Signals Flash for EL Stock

At first glance, it might be difficult to lend any credence to the bullish narrative on EL stock. It’s not just about the security eroding value over the past year. Analysts are quite skeptical about the company’s prospects. With an average price target of $81.84, the implied return won’t keep pace with the average rate of inflation.

However, the most bullish estimate — by Evercore ISI — calls for EL stock to hit $107, implying about 35% upside potential from where the shares are at currently. Over the next 12 months, that seems a very reasonable target. It also matches with a technical sentiment shift. Per TipRanks, the implied consensus interpretation based on the 20- and 50-day moving averages suggest that EL is a “Strong Buy.”

The fundamentals may also be smiling on Estee Lauder. As TipRanks recently pointed out, “management remains cautiously optimistic about medium- to long-term growth opportunities in China.” It’s also focused on its strategic initiatives to boost the bottom line. Plus, with the red ink in the charts, EL stock trades for 1.81 times sales, much lower than the 3.67x multiple back in Q1 of this year.

Why Call Options Make Sense

As stated above, Evercore analysts see EL stock reaching $107. If that happens, that’s a great return for a one-year play. However, holding onto a security for that long may not appeal to every investor. For those seeking big payouts over a shorter period of time, a simple multi-leg options strategy called the bull call spread may make sense.

Here’s how the process works: First, you buy a call option. At the same time, you sell a call at a higher strike price. Subsequently, the credit received from the sale of the short call partially offsets the debit paid of the long call. Essentially, you get a discount on your trade in exchange for capping the upside return potential (which is limited by the short call sale).

Frankly, the idea of capping upside potential seems wasteful until you consider that bull call spreads are short-term wagers. For the ultimate speculator, one could compound returns of several short-term call spreads. This is the kind of leverage that, while risky due to the all-or-nothing proposition of options, consistently tempts traders.

Real-World Example

Because the options market constantly fluctuates, it’s difficult to give a clear framework. Nevertheless, we can work through an example for the options chain expiring on January 17, 2025 to see the power of derivatives. For traders who want to play it relatively safe, the 75/80 call spread — buying the $75 call and selling the $80 call — may be enticing.

In options, risk is a multivariate concept: there’s the amount of cash at risk and there’s the probability of being successful or not. Stated differently, derivatives feature positional and probabilistic risk. What makes the 75/80 call spread tempting is that both headwinds are mitigated. First, $310 is at risk for a payout potential of $190 (or 61.29%). Of the available call spreads, the average positional risk stands at $409. Second, the breakeven point is $78.10, 1.5% below the stocks recent close.

Now, for the 75/80 call spread to be fully successful — that is, to hit the 61.29% payout — EL stock must reach $80 or higher. However, anything above $78.10 (not including other administrative costs incurred to enter the trade) will result in a partial profit. So, EL stock just needs to go sideways from the midweek session to extract a nice return. That adds a whole new element to your trading arsenal that you can’t get by merely buying the stock.

Is Estee Lauder Stock a Buy?

Turning to Wall Street, EL stock has a Hold consensus rating based on four Buys, 20 Holds, and one Sell recommendations. The average EL price target is $81.84, implying 3.22% upside potential.

Conclusion: EL Stock is Down but Not Out

Estee Lauder’s stock has suffered a significant 40% decline over the past year, reflecting challenges like shrinking sales and deepening negative cash flow. Despite these headwinds, technical indicators suggest a potential entry point for bold investors. With a sales multiple of 1.81 times — well below its historical averages — the valuation hints at an opportunity, especially as management focuses on growth initiatives in China and other strategic improvements.

For traders seeking a more dynamic approach, a bull call spread offers an intriguing play on EL’s recovery potential. For example, a 75/80 call spread expiring January 17, 2025, risks $310 to achieve a possible 61.29% return if EL stock moves above $80. With a breakeven point slightly below current levels, this options strategy provides a way to profit even if the stock remains relatively flat, showcasing a versatile alternative to traditional equity market investing.

Disclosure.