We're making a small buy of this troubled cosmetics firm and upgrading our rating on the stock
Shortly after the opening bell, we will be buying 50 shares of Estee Lauder at roughly $139. Following the trade, Jim Cramer's Charitable Trust will own 475 shares of EL, increasing its weighting to 2.1% from 1.9%. We're making a small buy in Estee Lauder and upgrading our rating to a 1. At Wednesday's closing price of $138 per share, the stock has essentially given back all of its gains from the post-earnings pop in February when CEO Fabrizio Freda declared the company has finally reached an "inflection point" and was positioned to return to strong organic sales growth and profitability in the second half of its fiscal year. We've been very patient about adding to Estee Lauder until we had more confidence that inventories in China and its travel retail channel have normalized. Any set back to the destocking process would likely cause management to push out when it expected to return to growth, causing the stock to fall. That's why we took notice Thursday when analysts at Deutsche Bank made a bullish call on Estee Lauder. Analysts at the firm named the stock of this prestige beauty company a "Catalyst Call: Buy Idea," pointing to a positive setup into earnings May 1. The analysts think it's likely that Estee Lauder will report an in-line to better-than-expected result versus Wall Street estimates while reiterating guidance. To be sure, the strong dollar could cause a tweak to the downside, but investors will be more focused on the operational results given the challenges the company has had. Deutsche Bank also sees management speaking constructively about its market share while maintaining its commitment to its so-called Profit Recovery Plan. As a reminder, Estee Lauder expects this plan will increase operating profit by $1.1 billion to $1.4 billion. The plan began in the company's fiscal 2024 third quarter — the one that just concluded — and is expected to be completed by the end of fiscal 2026. All in, Deutsche Bank thinks the results and commentary "would surpass market fears of a potential hiccup and spur relative relief in EL's stock price." We agree with this view. Given the fact that Estee Lauder shares are trading only a few dollars above when Freda said the inflection point was here, we think this is a sign the market wants to see the proof before the stock gets the credit. If Deutsche Bank is right and Estee Lauder makes the number, we expect a stronger move higher in the stock as well. That being said, the company isn't out of the woods just yet. Deutsche Banks acknowledges that the company still faces longer-term questions about category demand and execution. We agree with this as well, which is why we are keeping this buy on the smaller side – this is still a high-risk, volatile situation. Getting inventories clean will represent a major milestone in the company's recovery, but we still have some lingering concerns about the Chinese consumer and the company's ability to retake market share in the United States. On the latter point, we are encouraged by some of the company's recent efforts to expand its consumer reach. We were pleasantly surprised to see Estee Lauder finally embrace Amazon and open a premium beauty store on the online platform. Other prestige beauty brands have found success on Amazon, and we think the same will happen for Estee Lauder. According to Deutsche Bank, the current bull-versus-bear debate is on what multiple the stock should trade on $6 of earnings per share over time. They see the bulls arguing for a 30-times earnings multiple as the company begins the road to recovery from here, while the bears think it should be closer to 20 because they think the recovery will inevitably find problems. We fall on the more bullish side now that inventories have come down and management has a plan in place to boost profits and innovation. That said, we prefer to err a little more cautiously than those bulls. That's why we are using a 27 multiple on those $6 of earnings, which puts our price target at $162. Lastly, this buy falls in line with our investing discipline of putting money to work in the market when it is heavily oversold. Following Wednesday's decline in the market, the S & P 500 Short Range Oscillator moved deeper into oversold territory at -6.68%. As a reminder, we view an oversold market as a sign that stocks have fallen fast and we need to start thinking about the selloff more and more opportunistically. (Jim Cramer's Charitable Trust is long EL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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