This makeup giant is 'quite undervalued' and making a turnaround, says options trader Tony Zhang

Published Wed, Apr 3 202410:35 AM EDT

We've seen a noticeable uptick in volume and interest in Estee Lauder (EL) , after struggling significantly for the last two years to formulate a turnaround. Has the global makeup giant finally bottomed and proven that its business is investable again? In my opinion, with its strong expected future growth and high margins, EL is quite undervalued and offers an attractive risk/reward for investors to add exposure now in your portfolio. I'll describe a way to do that using options. After peaking at the end of 2021 around $375, EL has had a hard fall from grace, down over 70%, to just shy of $100 at the end of last year. EL 5Y mountain Estee Lauder, 5 years Since then, the stock has continued to complete a bottoming formation and has now printed 3 successful higher lows. This suggests that the downtrend has completed and is now a potential candidate to reverse back into a bullish trend. The stock has made multiple attempts to break out above $150. If the stock can maintain above $150 and break $160 my target is the low $200's and a $235 gap fill with a stop just below $140. While EL's forward earnings ratio may seem high at 36 times, we must consider the over 20% EPS growth rate that is expected for this year and nearly 88% expected for next year. Couple that with gross margins that currently stand at 70%, EL stands heads and shoulders above its peers and trades at a relative discount to its own history. If we use average historical valuations of 46 times forward earnings, EL's fair value sits around the $235 gap fill area, which aligns with the technicals. The trade The implied volatility rank of EL currently stands at 31%, which makes options on the expensive side. My preference is to be a seller of options here until EL breaks above $160, and then look to buy upside calls for the $200 target. I'm selling the May $150/$140 Put Vertical @ $3.65 Credit. This entails: Sell May $150 Puts @ $7.55 Buy May $140 Puts @ $3.90 This strategy would risk a total of $635 per contract if EL is below $140 at expiration, and potentially profit $365 per contract if EL stays above its $150 strike price at expiration. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.