In difficult times, people indulge in discretionary purchases that provide an emotional uplift without breaking the bank. This is known as ‘The Lipstick Effect’ and it has a run-on effect on stocks.
Insync Funds Management (Insync) CIO, Monik Kotecha, says while current focus on the macroeconomic landscape means most stocks are being tarred with the one brush, and are therefore taking a hit regardless of their results, a few are benefiting from The Lipstick Effect.
“Two examples of highly profitable companies in our portfolio benefitting from the Lipstick Effect are Lululemon and Ulta Beauty,” he said. “In their recent quarterly earnings updates, Lululemon reported a 29% revenue increase and a 30% increase in EPS - earnings per share. Ulta Beauty reported a 17% increase in revenues and a 25% increase in EPS.”
Mr Kotecha said long-term growth rates are what it’s all about.
“Whilst an economic slowdown may temporarily reduce the growth trajectories of high-quality companies, their long-term growth rates tend to be more assured,” he said.
“We invest in highly profitable companies with long runways of growth that are backed up by megatrends. With this, comes the higher confidence around longer-term earnings growth rates, irrespective of macro-economic conditions.”