We recently compiled a list of the 10 Best Beauty Stocks To Buy According to Short Sellers. In this article, we are going to take a look at where The Honest Company, Inc. (NASDAQ:HNST) stands against the other beauty stocks.
The US beauty market, which is seeing major shifts in distribution and customer interaction, continues to be a key area of interest for stakeholders. Beautymatter CEO Kelly Kovack underlined that consumer-driven channels have replaced traditional distribution strategies, compelling companies to engage with customers wherever and whenever they’re most comfortable.
According to a report, the US beauty market is expected to grow to $114 billion by 2027. On the other hand, the prestige channel saw its third straight year of double-digit growth in 2023, rising by 14% to $31.7 billion, outpacing the mainstream market across make-up, skincare, hair, and fragrance, according to the February 2024 CEW conducted annual “Global Trend Report” virtual event. Luxury brands represent the fastest-growing segment, with sales surpassing $16 billion, although being smaller at 11% of the market.
Bigelow Trading’s Daina Nadler emphasized the value of multichannel distribution plans that are customized to a wide range of consumer buying preferences. According to John Cafarelli, CEO of Beautymatter, 87% of US beauty lovers prefer in-store shopping, and 80% of them frequent stores that specialize in beauty products. In-store shopping continues to be popular. In order to increase traffic and loyalty, Space NK’s Noah Rosenblatt and H-E-B’s Jeanne Tamayo stressed the significance of creating compelling retail spaces and solid brand-consumer relationships.
In contrast, although offline retail in China is declining by 4%, e-commerce and social commerce, particularly Douyin, are growing at 9% and 57%, respectively, according to Nielsen IQ. China is a resilient beauty market, and despite all of the difficulties following the pandemic, it remains the world’s second-largest beauty market, posing numerous challenges for international suppliers notes Vice President of Nielsen IQ Gautam Seth. He also points out that local companies are more successful because they employ local ingredients and have a strong cultural connection. Industry giants like Jina Lee of Urang and Kim Da Jeong of Lotte Department Store have stressed the importance of consumer knowledge about ingredients and product efficacy.
The emphasis on diversity is also influencing the global beauty market, although many individuals continue to feel underrepresented in health and beauty advertisements as per Circana. Expectations from consumers about varied representation in terms of gender, color, age, ability, body size, and sexual orientation are at an all-time high. A general market and a multicultural market will not differ by 2044 due to the majority-minority population in the United States. According to a study by SeeMe Index and Circana, brands that are certified inclusive grow 1.5 times faster than brands that are not. Additionally, the likelihood of seeing individuals over 55 in these brands’ advertisements who equally represent straight and homosexual partnerships is 2.5 times higher than that of less inclusive brands, which are 12 times more likely to just feature straight relationships.
Looking ahead, the global beauty market is expected to generate retail sales of over $580 billion by 2027, with an annual growth rate of 6% per report.
One area gaining attention and stimulating beauty business is the growing consumer interest in wellness within beauty. According to a survey on wellness trends in 2024, 82% of US consumers, 87% of Chinese consumers, and 73% of British consumers now rank wellness as a top or important priority in their daily lives. The Goop, one of the “Most Successful Celebrity Beauty Companies in the World,” philosophy is that “beauty is wellness and wellness is beauty.” Beauty firms are entering this space. A massive beauty brand and the Stanford Institute on Longevity have teamed up to develop a new age-reversal technology-powered product.
Methodology:
We sifted through holdings of beauty ETFs and online rankings to form an initial list of 20 beauty stocks. Then we selected the 10 stocks that had the lowest percentage of their shares shorted. The stocks are ranked in ascending order of the lowest percentage of their shares shorted.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
A close up of different packs of diapers and wipes, demonstrating the company’s main product range.
The Honest Company, Inc. (NASDAQ:HNST)
% of shares shorted: 2.55%
One of the Best Beauty Stocks To Buy According to Short Sellers, The Honest Company, Inc. (NASDAQ:HNST). The company established by American actress Jessica Alba is a digitally native consumer goods manufacturer that manufactures products with a purpose and that are accessible to everyone. Since it is an omnichannel company, customers can purchase its goods through the company’s retail and digital platforms wherever they buy. The company sells three different product categories: Household and Wellness, Skin and Personal Care, and Diapers and Wipes. Of these, the sale of diapers and wipes accounts for the majority of its revenue. The company is limited to US operations.
Meridian Contrarian Fund stated the following regarding The Honest Company, Inc. (NASDAQ:HNST) in its fourth quarter 2023 investor letter:
“The Honest Company, Inc. (NASDAQ:HNST) is a consumer products company focused on developing natural baby-care consumables, cosmetics, soaps, and other household supplies. Honest went public in 2021 as the pandemic helped drive high demand for its cleaning products. Subsequently, global supply chain challenges proved exceptionally tough for the smaller company. We view the Honest brand as an authentic differentiator that has outgrown its categories despite the operational challenges that significantly hurt recent earnings potential. The Honest Company’s outperformance in the quarter and second half of 2023 was driven by the company showing increased traction on sales returning to growth – despite significant SKU rationalization – along with deepening relationships with the largest retailers in the US, Walmart, Target, and others. The results increased optimism into 2024 and beyond as the new management team makes improvements to the company’s product positioning, along with improving cost control. With significant white space to grow sales of its winning products on shelves and online, we expect The Honest Company to see years of growth and increasing returns. We added to our net holding over the course of 2023 to take advantage of the deeply discounted stock. Yet, we harvested some tax losses early in the fourth quarter to manage taxes and maintain appropriate risk exposure.”
Following the company’s Q2 2024 results and raised guidance, Loop Capital increased its price objective for Honest Company from $3 to $5 and maintained its buy recommendation on the shares. Despite strong Q1 revenue growth, profitability gains, and a strong balance sheet, the company’s shares finished down 2% year to date. The analyst informs investors in a research note that the stock will catch up with the market’s performance due to the outsized growth in Q2. The firm may be open to take-out offers if profits improve because shares are still much below the $16 IPO price, the firm added.
In Q2 20224, revenue reached a record $93 million in revenue, up 10% YoY, and improved profitability with a 38% gross margin YoY driven by strong sales growth across the wipes and baby product portfolios. Additionally, the company expects revenue growth in the second half of the year to match the first half’s 7% growth.
Insider Monkey monitored that 18 hedge funds out of the 912 hedge funds held a position in The Honest Company, Inc. (NASDAQ:HNST) as of the end of the Q2 of 2024. George Mccabe’s Portolan Capital Management is the largest shareholder in the company, with 8,105,357 shares worth $23.67 million.
Overall HNST ranks 10th on our list of the best beauty stocks to buy according to short sellers. While we acknowledge the potential of HNST as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than HNST but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
