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Analysts at Bank of America were anticipating that beauty stocks would fare “stronger than ever.”
The BofA analysts predicted that in the fragrance business, which they estimate to be worth $26 billion, the “sweet scent of opportunity” would come from the market.
According to BofA, L’Oreal made 2.8 billion euros ($3.4 billion) in perfume sales in 2020, accounting for 10% of total revenue. It is the world’s leading fragrance company, producing perfume under license for fashion houses such as Prada and Valentino. According to the analysts, its Giorgio Armani and YSL brands, which include skincare, makeup, and fragrance, are part of a “billionaire club.”
LVMH, a French luxury conglomerate, controls 12% of the fragrance industry, and its brands, which include Givenchy, Guerlain, and Christian Dior, contributed 1.8 billion euros to group sales last year. BofA prefers to make its own fragrances rather than licensing its brand names to perfume manufacturers. According to the analysts, “LVMH’s competitive advantage lies in its well-diversified brand portfolio, on-brand communication, in-house manufacturing, and high-quality distribution.”
Givaudan, a supplier of perfume ingredients, is a favorite of BofA, which appreciates its master perfumers, known as “noses,” as well as its range of molecules — the constituent parts of an aroma for which the company has filed patents. Analysts also remarked on its “high margin” business.
International Flavors & Fragrances (IFF) has a market share of around 20% in the perfume ingredients sector, according to BofA, and the bank likes its “healthy and stable” margins. “While IFF does not disclose the margin profile for its Fine Fragrance business, it has stated that gross margins range from 50 to more than 60 percent,” the analysts wrote.
“As lockdowns are lifted, we believe fragrances, one of the beauty industry’s main casualties of Covid-19, are bound to make a comeback; and arguably stronger than ever as brands adjust to life in a digital world,” the analysts wrote.
According to BofA, in order to join the “billionaire club,” a perfume brand must outperform the market through innovation and premiumization, and the “icing on the cake” is when a brand expands into other categories such as make-up and skincare.
However, according to analysts, apparel brands have found it difficult to succeed in the beauty market at times. “Fashion does not ‘naturally’ fit into a category associated with research and technology rather than glossy advertising.” As a result, only five of the top-23 fashion/luxury brands now have a presence in skincare,” they wrote. Tom Ford, Dior, Givenchy, Giorgio Armani, and YSL are among them.
“Over the 2010-2019 period, companies such as Estée Lauder and L’Oreal have consistently outperformed the fragrance category; and while LVMH does not provide granularity by category, we would assume that it has done so as well, given solid (+9%) organic top-line growth in Perfumes & Cosmetics,” the analysts added.
From the other side, talking about stocks that could drop their price, the more the stock price rose for Wendy’s on Tuesday, the more bearish a prominent Wall Street company became.
In a letter to clients on Wednesday, Stifel analyst Chris O’Cull downgraded the restaurant stock to a hold, noting that the Reddit-fueled price rally outpaced the underlying profit growth for the firm.
“Although we remain positive about the company’s fundamental outlook,” the note said, “we believe the stock’s current valuation… fully reflects the growth we were assuming to reach our target price.”
Stifel’s decision follows a trend of Wall Street firms declining to forecast what will happen next with the stocks that become the focus of these meme manias. Some firms have downgraded or discontinued coverage of these stocks, including Bank of America’s withdrawal from GameStop and Bed Bath & Beyond.
It’s perhaps fitting that a restaurant selling chicken tenders became a Reddit favorite, as “tendies” is a forum slang term for trading profits. O’Cull’s note was titled “Wendy’s tendencies cause us to move to the sidelines.”
According to the note, Stifel remains bullish on Wendy’s, owing in large part to the company’s successful introduction of breakfast service.
“Thus far, the company has seen encouraging data indicating that the morning daypart has contributed to an overall increase in consumer frequency without cannibalizing occasions in the core business,” according to the note.
Wendy’s stock was up 2% in premarket trading on Wednesday.
The Market on June 8, 2021
At the index level, the chart continues to extend the shelf around the 4,200 level, hesitant to break to new highs but also lacking sellers’ urgency after nearly two months of opportunities to exit near record highs.
The key feature of today’s setup is the compression in Treasury yields; bonds were bought early on a weaker NFIB number and held the bid through a piping-hot JOLTS help-wanted reading – possibly because labor shortage is A) not going to budge the Fed and B) acts more as a restraint on economic pace than an inflationary push in the short term. Perhaps, just as everyone is bracing for inflation, we will see a stutter-step in growth as the incremental surprise.
Even with the yield drop, the early gain in mega-Nasdaq names and drop in bank and energy stocks reversed. The rotational action is constant and sometimes difficult to navigate, but it is keeping the tape buoyant for the time being.
However, the whippy, goofy action in meme stocks is likely contributing to the market’s “don’t make big bets” vibe. The hunt for supposedly crowded shorts – many of which are not crowded at all – is predictable. And CLOV is a legitimately abbreviated name.
However, Wendy’s is a wacky target, accounting for less than 5% of the float and a name that many fundamental owners are willing to part with on a wild spike. The stock opened at $27, immediately traded down to $25.50, and has been trading below the opening print for the majority of the day. AMC has swayed a little. The game never ends, but it does move to different locations.
Sneaky bids in old legacy tech (IBM, ORCL, CSCO) and laggard FAANMG (AAPL and AMZN), while semis struggle (some spillover from crypto weakness in part). Even as meme names with flimsy/irrelevant fundamentals rip, there is a bias toward “quality.” Again, some chop and air pockets, but consumer and industrials remain firm.
This quarter has seen a very subtle bout of underperformance in riskier credit versus Treasuries – nothing serious or reflective of genuine stress, but notable in that it hasn’t fully confirmed the S&P last little run higher above 4,200. It might take care of itself, but it’s worth keeping an eye on.
Market breadth is moderately positive, with a lot of give-and-take beneath the surface, but over 400 new 52-week highs on the NYSE is pretty strong and encouraging, all else being equal.
The VIX is up slightly, but it is still below 17. We are keeping a close eye on the Reddit volatility bursts. When VIX trades at a significant premium to the S&P 500’s actual “realized volatility” over the last month or so, it usually means VIX will fall. Though the inherent insecurity of an economy nearing 10% nominal GDP, with lots of hot money flowing and a Fed policy-shift vigil underway, may prevent VIX from falling as quickly as textbooks predict.