An Estee Lauder cosmetics counter in Los Angeles, California.
Lucy Nicholson | Reuters
(This article was sent first to members of the CNBC Investing Club with Jim Cramer. To get the real-time updates in your inbox, subscribe here.)
We exited our position in Estee Lauder (EL), selling 100 shares at roughly $365.67. Following the trade, the Charitable Trust no longer holds a position in EL.
We bought Estee Lauder earlier in the summer because we viewed the company as one of the great reopening plays, thanks to our belief that people wanted to look their very best as they emerged from their homes and gathered in social settings again. We also thought Estee Lauder would be one of the key beneficiaries of loosening Covid restrictions such as mask mandates and travel restrictions.
Our thesis played out as we expected. Estee Lauder posted strong results in its most recently reported quarter, with strong double-digit growth in categories like skin care, fragrance, and makeup and a rebound in travel demand.
As much as we still consider EL to be a great reopening play, we want to be a little more careful here due to the rapid spread of the omicron variant. One of Estee Lauder’s primary markets is in duty free, and an upcoming slowdown in travel may make the near-term numbers a little too optimistic. Plus, the potential return of mask mandates and limits to social gatherings may further complicate the near-term earning story.
Typically, our patience and long-term investment horizon mean we are willing to tough out any short-term blips to an earnings story. But here is the thing. Unlike many stocks in the market right now, Estee Lauder trades right around an all-time high. If shares were down 5% or more from their peak, we could argue that the Covid uncertainty was priced in. However, EL has powered through the recent volatility in the markets despite its premium price-to-earnings multiple.
We never want to catch ourselves being greedy amid uncertainty, and therefore we will sell our small Estee Lauder position near its all-time high for an average gain of about 22%.
Despite our exit today, we still think Estee Lauder is an exceptionally run company and a long-term winner in its category. We will continue to monitor the stock for pullbacks to levels that offer a better risk reward.
Lastly, this sale will free up some room in the portfolio for a potential new name. This concept goes back to one of the portfolio management disciplines we explained last Thursday in our inaugural Investing Club meeting. We are firm believers that every portfolio manager must cap the number of stocks they own at any given time. If you constantly add new stocks to a portfolio without ever taking anything off, you run the risk of cutting short …….