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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 the day-to-day homework that is necessary to stay on top of your portfolio. If we want to buy something new — and we are always on the hunt for new ideas — we are going to part with something in the portfolio that has a less attractive risk-reward.
Separately, we want to call attention to the big move that is going on right now at United Parcel Service (UPS). UPS had a strong day Wednesday after Citi upgraded its rating on the stock to buy and increased its price target to $250, thanks in part to conviction in CEO Carol Tome’s “Better, not Bigger” strategy. The positive action is following through Thursday, with shares pushing even higher as investors continue to focus on companies with strong fundamentals and trade at very reasonably priced earnings multiples. We also think UPS may be trading higher in anticipation of what many hope to be a “not as bad as feared” earnings release from FedEx (FDX) after the closing bell tonight.
We are not trying to make a call on the FDX quarter, but their inconsistent track record and struggles with managing cost has us leaning towards wanting to be more defensive when it comes to UPS, especially with the stock up nicely over the past few days. For that reason, we would trim 100 of our 725 UPS shares if we were not restricted from trading.
As a reminder, we are restricted from trading any stock that Jim mentions on TV for three full days following the mention. Although we cannot make the trade for the Charitable Trust, our restrictions will never prevent us from telling the Investing Club what we would buy or sell and when we would do it.
The CNBC Investing Club is now the official home to my Charitable Trust. It’s the place where you can see every move we make for the portfolio and get my market insight before anyone else. The Charitable Trust and my writings are no longer affiliated with Action Alerts Plus in any way.
As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. See here for the investing disclaimer.
(Jim Cramer’s Charitable Trust is long UPS.)