Two Consumer Brands GARP Opportunities: One I Recently Bought, And One I Heavily Added To

seekingalpha04-16

Oddity Tech is positioned to deliver multiple times investors' money.Lululemon is a dropping knife right now, but long-term buyers will smile.The valuations might even be cheap for these two high-ROIC...

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We AreOpener I invest actively in the stock market for two major reasons. Firstly, and perhaps most obviously, I seek to beat the market and create wealth over the long term. Secondly, I genuinely enjoy picking stocks. I derive satisfaction from estimating my odds, learning about great businesses, and sharing my insights here. Indeed, there are numerous ways to profit in the market. Trading, for example, offers potential returns, albeit with unfavorable odds – though it's not a path I pursue. Classic value investing involves buying undervalued stocks, requiring a keen eye to discern that their current issues are not significant. This approach demands high skill and experience. Then there's quality growth investing, or GARP (growth at a reasonable price), which, in my opinion, is the optimal approach for private investors due to the advantages they possess over large funds, such as patience, freedom to invest without restrictions, and an endless time horizon. In my view, value plays require higher technical skills that I'm not sure every retail investor has. When you buy a quality company, you eliminate business risk to a much greater extent, in contrast to a value play where the business could be poor, but the price is amazing. While my main focus lies in quality GARP investing, I occasionally delve into value plays, particularly in high-quality businesses. Today, I'll share two GARP opportunities I've recently invested in, but one could describe them as a value play if they prefer. Oddity Tech This is the largest holding in my portfolio. I recently added a significant amount during the drawdowns, which I view as merely background noise for the long-term thesis and opportunities to lower my average cost. My aim is to invest in long-lasting compounders. I don't necessarily need to find a company that will return 100 times the money I invested, but I do want to find businesses that can compound at a higher rate than the market over the long term. However, Oddity (ODD) is a company I can see returning ten times my money in a decade. To see this company at a $20 billion valuation in 2034 wouldn't be an unrealistic dream, although very optimistic. Let me give you a short pitch: Oddity is a founder-led, high-growth business aiming to disrupt the beauty industry. Their strategy primarily revolves around leveraging technology, employing a differentiated selling approach, and offering high-quality products. Currently, it has two successful brands, IL Makiage, and SpoiledChild, with two more on the way. If you search for IL Makiage/SpoiledChild on Google and explore the websites, you'll encounter a whole different experience than with other beauty brands. At Oddity, much of the focus is on the tech side – how to sell you the best product through machine learning and algorithms. You don't just buy products blindly; you can even try before you buy. Now, you might say these are just marketing gimmicks, but the products themselves are quite good, with great reviews on both brands on Trustpilot. You can see it in Oddity's numbers – the company is growing like a weed, and the CEO, Holtzman, is constantly talking about slowing down growth to a 20% annual pace. How many companies have you heard of trying to slow growth? Turning to the first quarter. As we discussed last year, we deliberately slowed the business down in the back half of 2023 in order to pace our growth, while our teams focused on huge preparations for 2024. ODD is growing (finchat)The unique part here is that the company is super profitable, with a 20% EBITDA margin target which they have exceeded, and a 47% ROIC (!). The combination of solid top-line growth and high ROIC is a winning one in many cases. The bonus is that Oddity is still small, and the beauty market is huge. I see a lot of growth ahead for Oddity, with lots of profits. Now, guess the valuation – you assume it's probably uninvestable with a sky-high valuation, right? Not quite. Since Oddity is a small Israeli company, I assume Americans aren't comfortable buying it without a big margin of safety, especially with the recent tensions with Iran that further dropped the stock. The fact is, as an Israeli, there will be no effect on Oddity. The vast majority of sales are in North America, and the Israeli workers are in the R&D segment and can work from home in case of a massive war here, plus their offices are in the relatively safe Tel Aviv. Back to valuation, the fact that a patient investor can now buy the stock at 23 times NTM earnings is absurd to me. Keep in mind that sales grew 44% last quarter. If I assume 20% top-line growth looking forward, which is actually much lower than the growth Oddity has presented, with this NTM PE I get a 1.1 PEG. Yes, it's not the low price we saw in November, which I still regret not knowing about the stock back then, but in my view, it is cheap for a business that can grow profitably with a huge TAM ahead. In my view, there are dual engines here – multiple expansion as well as earnings growth that can last. Just for comparison, it has the lowest multiple among peers like L'Oréal, ELF, and Estée Lauder, despite growing with the highest ROC and the most room for growth. Maybe I sound too bullish, but there are risks, mainly in the loss of brand relevance, consumer taste, and competition.   EV/EBITDA (seeking alpha)You can further dig into the company in the following article I wrote in January. Lululemon Well, in the case of Lululemon (LULU), of course, I don't expect a 10X return, but I do think it will outperform over the long term. Here, it is reasonable to assume that the market will stabilize after the recent drop since the report, and will understand that there is an opportunity for dual-engine growth, both in multiples and earnings. I believe the market will eventually correct itself, as it's the nature of Mr. Market to initially punish, then reassess, and potentially correct misjudgments. This adjustment might occur within a month or even six months, but if the business performs well, it's bound to happen. When it does, the turnaround can be swift. For instance, after the report, Oddity experienced a 12% decline, but within a few days, all losses were recouped as rational investors recognized the positive aspects of the report (this was before the tensions with Iran). I anticipate that soon the market will recognize Lulu's potential, perhaps spurred by a catalyst. Lululemon is a high-quality company and a rare, long-lasting winner in the fashion space. The market punished it in the last earnings report as the guidance was weak. Well, Lulu's valuation has been stretched for a while now, and the stock hasn't climbed for three years. However, the valuation has been stretched for a good reason. There are not a lot of businesses in this industry that have managed to maintain a strong brand with high returns on capital and growth for such a long time, like Lululemon. Of course, the big model is Nike (NKE), which has a strong brand that does not deteriorate for decades. I think the market is a bit pessimistic about Lulu's future. Yes, the growth probably won't be at the 20% CAGR as we have seen in the last few years. But at a 15% bottom-line CAGR, including buybacks, it will be above market expectations and will likely lead to multiple expansion or a return to its mean. What are the reasons that could propel such growth? Firstly, it is a premium, super-strong brand with plenty of growth ahead. It still has a lot of untapped markets it could grow into. Israel is an example. They have only one store here, in one of the most famous squares in Israel, which is also a way of marketing. Interestingly, the rising competitor, Alo, opened right next to it. Lulu has a working capital advantage. It has negative working capital, which means that like a good retailer, it is collecting cash before paying suppliers, with a DSO of 5 and DPO of more than 20. It is a DTC seller and is doing what Nike has been dreaming of and working on for years. It has more than 40% of revenue through its e-commerce ventures. The majority of sales come from North America, so there is a lot of global expansion ahead. It is also expanding into other markets like men's wear, hiking, casual wear, and more. Negative WC (finchat)It is the super-strong brand power leading it forward, along with premium prices. Premium is the middle ground between mass-market brands like Nike and luxury brands like Dior (OTCPK:LVMHF), and I think Lululemon is the perfect brand for it. I asked my girlfriend's friends what they think about the brand. First, the price is too high for them, but it also makes them want it because of the quality and status symbol. One of them moved to the US and bought a pair. She says it's a status symbol, and she had to have it. On the other hand, some girls appreciate Alo Yoga and think it is a trustworthy competitor, while some think Alo has less premium appeal than Lululemon. I think that a TTM PE of 28, which is significantly below past averages, makes Lulu quite cheap. Also, 23 times NTM earnings for a company that is likely to grow EPS in the mid-teens area along with more than a 40% ROIC is definitely reasonable, and you won't find that a lot in the American markets. On top of that, Nike is trading at a similar multiple despite lower growth, lower margins, and less efficiency. Lowest multiple in years (finchat)The first risk, in my view, is the rising competition. I don't like to invest in the apparel industry because consumer preferences are changing fast, and brands can be hit hard, as seen with Under Armour (UA). The second risk, in my view, is that men in some markets will see the brand as more feminine. I think it is now like that in Israel. Lulu will need to invest heavily in marketing to change men's view of the brand because right now, it seems many men see it as a sport-focused women's brand. Such investment in marketing could affect margins, which are already stretched high, and we shouldn't expect more from them. You can further delve into my last articles on Lulu, here and here. Conclusions I believe that the risk-reward ratio here is tilted in favor of long-term buyers, and at current prices, both stocks could outperform the market. Additionally, I'd like to emphasize that both stocks are potential compounders, meaning they could be held for years. Even if they seem expensive, these are not stocks to dump after a double. There are risks, in my view, and I wouldn't underestimate them. However, I think that patient investors have an edge with these kinds of stocks. Unlike big funds, they can hold and wait for catalysts, as funds are scrutinized quarterly. Just sit tight and wait for the compounding effect.  I hope you enjoyed the article and look forward to your comments","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2427383918"}