(Bloomberg) -- Wall Street analysts are telling investors to snap up Elf Beauty Inc. shares on the cheap, and politics is playing a role.
The low-cost makeup provider’s stock suffered its biggest three-day drop this week since the early days of the pandemic. Driving the decline was the rising expectation that former President Donald Trump will re-take the White House in November and increase tariffs on imports from China, where Elf says more than 80% of its supply chain is located.
That prompted Robert W. Baird & Co. analyst Mark Altschwager to turn bullish in a July 18 note that boosted his rating to outperform, lifted Elf’s price target and promoted “the stock’s recent pullback as an attractive buying opportunity.”
Trump said earlier this year that he might impose a tariff on Chinese goods of more than 60% if elected. Altschwager estimates Elf would need to raise prices an average of about 10% to offset the impact of any such move.
Given the brand has an average selling price around $6, “this increase appears manageable without jeopardizing its competitive position,” he said, noting that the average price for rival mass brands is closer to $9. Altschwager lauded Elf’s “demonstrated pricing power and still attractive price positioning vs. peers.”
He wasn’t alone. Analysts at JPMorgan Chase & Co., Canaccord Genuity Group Inc. and Piper Sandler Cos. also hurried to defend the stock this week. (After all, Elf has 12 buy, three hold and no sell ratings along with an average price target of $223, almost a one-third gain from the current price, according to data compiled by Bloomberg.)
Elf has previously navigated an increase in tariffs, and the company still drove gross margins higher, according to Canaccord Genuity’s Susan Anderson.
“The recent pressure has been overdone and although new tariffs would be an unwanted speed bump, we expect ELF to continue to strongly execute on their growth strategy and utilize multiple levers to reduce the impact,” she wrote in a note.
If the analysts are right, the opportunity continues to brighten. Elf shares are down on Thursday after erasing an earlier gain, following a decline of about 20% in the previous three days.
--With assistance from Katrina Compoli.
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