Despite the turmoil surrounding multi-level marketing companies, with billionaire Bill Ackman launching an offensive against Herbalife Ltd. (NYSE:HLF), Avon Products, Inc. (NYSE:AVP) saw its stock up 20% after its earnings announcement. Avon investors took the numbers as “stabilizing” and a sign that restructuring might be taking hold for the company, but is it too rich for investors to buy in now? I wouldn’t go that far (read more about the earnings over reaction).
Multi-level marketing companies have been under pressure of late thanks to Ackman’s Herbalife accusations. With Herbalife in the spotlight, new speculation has arisen concerning Nu Skin Enterprises, Inc. (NYSE:NUS). The accusations of Nu Skin Enterprises, Inc. (NYSE:NUS)as a pyramid scheme goes back to the early nineties. However, fellow MLM company Avon has not seen as much pressure as Herbalife and Nu Skin. Both are still down over 8% since Ackman’s attack on Herbalife–Avon, meanwhile, is up over 40%.
Avon managed to report EPS of$0.37 per share versus consensus of $0.27. This is well above the flat earnings per share the company posted for the same quarter a year ago. For its top market, Brazil, revenue rose 10%, but for its fastest growing market, Asia, revenue rose a mere 3%.
Fellow beauty products company Nu Skin has also managed to post solid results for its latest quarter, posting EPS of $0.97, compared to $0.76 for the same quarter last year, and above consensus of $0.96. The company also upped its revenue guidance by $50 million to between $2.3 billion and $2.35 billion.
The unfavorable product mix for both Nu Skin and Avon should put pressure on the companies going forward. Also, weak discretionary spending will pressure the stocks. Avon’s management has outlined unexciting growth expectations for the company, with revenue expected to come in at mid-single digit growth, and a low double-digit operating margin over the next three years. The company also cut its quarterly dividend by $0.06 per share to $0.23 per share, dropping its dividend payment and lowering its yield from over 4% to a mere 1.15%.
Avon has been seeing pressures from various products and product lines, where competitionis fierce in the niche beauty products market. Pressures include those from Estee Lauder Companies Inc (NYSE:EL) and Revlon Inc (NYSE:REV), whoseproducts are sold through direct-sales companies, as well as internet and mass-market retail channels. Both of these companies have posted better than expected earnings results. Estee Lauder posted last quarter earnings of $1.16 per share, which were up 15% from the prior-year quarter, and ahead of the management guidance range of $0.97-$1.03. Estee also owns brands that includes MAC, Bobbi Brown and Clinique.
Revlon’s last quarter earnings were up 28% from the same quarter last year. Revlon’s brands includes Almay, Pure Ice, Charlie and Mitchum. Driving Revlon has been sales growth of 14% for the U.S. segment and 15% for Latin America. Revlon is up over 40% year to date already, whereas Avon is up almost 30% over the same time period.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.
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