Estee Lauder cosmetics counter in Los Angeles, California.
Lucy Nicholson | Reuters
(This article was first sent to members of the CNBC Investment Club along with Jim Kramer. To receive real-time updates to their inbox, subscribe here.)
We closed our position with Estee Lauder (EL) by selling 100 shares at approximately $ 365.67. Following the transaction, the Charitable Trust no longer has a position in EL.
We bought Estee Lauder earlier this summer because we considered the company one of our greatest opening performances, thanks to our belief that people want to look their best when they leave home and gather on social media again. We also thought that Estee Lauder would be one of the key beneficiaries of the relaxation of Covid restrictions such as mask bans and travel restrictions.
Our thesis met our expectations. Estee Lauder posted strong results in its most recent reporting quarter, with double-digit growth in categories such as skin care, perfume and makeup, and increased travel demand.
Since we still think EL is a great game to resume play, we want to be a little more careful due to the rapid proliferation of the omicron variant. One of Estee Lauder’s major markets is in the duty-free zone, and the impending slowdown in tourism growth could make short-term numbers too optimistic. In addition, the potential return of mask bans and restrictions on social gatherings could further complicate the earnings situation in the near future.
Typically, our patience and long term investment horizon means that we are prepared to weather any short term setbacks in the profit history. But here’s the thing. Unlike many stocks on the market right now, Estee Lauder is trading near all-time highs. If the stock were down 5% or more from its peak, we could argue that the Covid uncertainty was factored into the price. However, EL has managed to overcome recent market volatility despite its premium-to-earnings multiple.
We never want to catch ourselves greedy in the face of uncertainty, and therefore we will sell our small position in Estee Lauder, close to all-time highs, with an average return of about 22%.
Despite our departure today, we continue to see Estee Lauder as a purely managed company and a long-term winner in its category. We will continue to monitor stocks for pullbacks to levels that offer the best risk reward.
Finally, this sale will make room in the portfolio for a potential new name. This concept goes back to one of the portfolio management disciplines that we explained last Thursday in our first meeting of the Investment Club… We strongly believe that every portfolio manager should limit the number of shares he owns at any given time. If you continually add new stocks to your portfolio without taking anything off, you run the risk of cutting back on the day to day housework required to stay at the top of your portfolio. If we want to buy something new – and we are always on the lookout for new ideas – we are going to part with something in the portfolio that has less attractive risk rewards.
Separately, we would like to draw your attention to the big step that is now taking place at United Parcel Service (UPS). UPS had a good day on Wednesday after Citi upgraded its stock rating and raised its target price to $ 250, thanks in part to a belief in CEO Carol Tome’s “Better Not More” strategy. Positive dynamics are expected until Thursday, with stocks set to rise even higher as investors continue to focus on companies with strong fundamentals and trade at very reasonable multiples. We also think UPS could trade higher in anticipation of what many hope will be “not as bad as expected,” FedEx’s (FDX) earnings report following tonight’s close signal.
We’re not trying to bet on the FDX quarter, but their inconsistent track record and cost management issues make us tend to be more defensive when it comes to UPS, especially given that stocks have increased significantly in the past few days. For this reason, we would have cut 100 of our 725 UPS shares if we had not been restricted from trading.
As a reminder, we are prohibited from trading stocks that Jim mentions on TV for three full days after being mentioned. While we cannot trade for the Endowment Fund, our restrictions will never prevent us from telling the Investment Club what we will buy or sell and when we will.
The CNBC Investment Club is now the official home of my Endowment. This is the place where you can see every step we take with the portfolio and get my understanding of the market before anyone else. The charity and my articles are no longer affiliated with Action Alerts Plus.
As a subscriber to CNBC Investment Club with Jim Kramer, you will receive a deal notice before Jim makes a deal. Jim waits 45 minutes after sending a trade notice before buying or selling stock in his charitable fund’s portfolio. If Jim was talking about stocks on CNBC TV, he waits 72 hours after issuing a trade alert before making a deal. See the disclaimer here…
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