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Stock Market Wobbles; More on ELF’s Naturium Buy

September 7, 2023

This is a chart of SOXL which is sensitive to momentum and sentiment around semiconductor shares. It is flashing a warning. The blue line for the shorter term moving average has clearly turned down which does not happen very often and has signalled further weakness ahead in the past.

10 Year US Bond Yields Firmly Through Four Per Cent

Another chart which could contribute to downside pressure on share prices is the chart for US 10 year government bond yields.

Falling bond yields would be good news but there is no sign of that on this chart which is more suggestive of yields moving higher.

Why Naturium Looks an Even Better Deal for ELF

Just to recap, ELF is buying Naturium for $355m with the deal closing on 30 September, exactly halfway through ELF’s financial year ending 31 March 2024. Naturium is a skin care company whose products are priced between mass and prestige in an area of the market known as masstige.

This is different to ELF which is a copycat company. It copies prestige products with products that are similar in quality but at mass market prices. Its products appeal to teenage girls and boys and the generation Z individuals born in the late 1990s and early 2000s.

Naturium’s products which are both plant based and with some science are more expensive and aimed at Millennials and above many of whom are earning serious money and may feel that their skin needs some more expensive help as sun and city life take their toll.

Elf CEO, Tarang Amin, said recently that the barriers to entry within the beauty business are low and there are many brands around but very few exceed $15m in annual sales and even fewer $50m. Not only has Naturium done this but it has done it in four years. I have been looking at their sales progression and in the last four years it has been approximately $10m, $30m, $50m and with $90m forecast for the latest year to 31 March 2024. It is also profitable.

Naturium will double ELF’s skin care sales but even then they will be just three per cent of a large market.

This company has hit the ground running which makes me wonder why it was for sale. One reason, of course, was a four year payback of $355m. I discovered more about why when I looked into the history of the business.

A man called Ben Bennett, a charismatic Thai who calls himself a dark Asian (I don’t know where his very English sounding name came from), has a knack for launching new beauty brands. He set up a company called The Centre to incubate new beauty brands, one of which, by far the star performer, was Naturium. In June 2021 amid much controversy it was revealed that a powerful beauty industry influencer called Susan Yara was a founding shareholder in Naturium. The controversy was because Yara failed to disclose her interest while promoting the products through her podcasts.

Her followers were furious, she apologised and the storm blew over but meanwhile sales exploded.

I have found out a bit more about Bennett. He says his specialty is starting companies and taking their sales to around $50m. What he is not good at, he says, is taking sales from $50m to $1bn so it makes total sense for him to sell Naturium to a company, ELF, supremely qualified to do just that. The deal also includes some $80m of ELF shares to incentivise founders and management. Meanwhile The Centre will now be hugely cashed up for more exciting start-ups.

Maybe he could have got more money from L’Oreal, Estée Lauder or another of the giants but the fit would not have been so good and any shares acquired would not have been so exciting to own. Also interesting is that Ben Bennett and Susan Yara are now in bed with ELF and who knows what that might lead to in future for some very ambitious people.

Another interesting point about Naturium that came out in the presentation is the scope to add distribution for their products.

And look at the numbers for brand awareness.

The scope to put this brand on the map looks incredible. If sales continue to grow rapidly Naturium could look an amazing deal for ELF.

My conviction that E.L.F. Beauty (ELF) is a very exciting share is becoming stronger by the day.

I have also been listening to more interviews with Kory Marchisotto, the chief marketing officer, who is both articulate and opinionated on both women in business and the best way to market ELF’s products. I am not surprised she has had such an impact since she joined the company in 2019. Hopefully she won’t leave to become a CEO somewhere else because she is such a talent. At least she is already a multimillionaire with over $17m worth of ELF shares from which she recently sold a parcel to raise $2m.

Strategy – Make Sure to Own Some ELF Shares

This chart looks rock solid; just what you would expect for a business in an explosive growth phase.

Share Recommendations

E.L.F. Beauty. ELF. Buy @ $134

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