Play Avon’s Recovery to Your Advantage

Timing is everything. This rings true in every aspect of life.

Take my wife and me, for example.

We first met at a restaurant while we worked our way through college — I fell in love with her but she didn’t quite like me yet. It took me several years before I talked her into marrying me.

And to this day, we both agree that the timing of when we first met just wouldn’t have worked out. Had we dated back then, odds are one of us would have screwed it up and we wouldn’t have the beautiful family we have today.

We simply weren’t ready to make that type of commitment.

That same importance of timing is true in the stock market — some stocks just need more time before you should buy them…

That’s where a stock like Avon Products (NYSE:AVP), the women’s global cosmetics giant, comes in.

While the broad stock market has been on an absolute tear since 2009, Avon stock has plummeted. The company has lost market share, suffered declining revenue and faced negative earnings, while investors simply fell out of love with the company.

Much like me and my wife in our younger days, it just wasn’t the right time to make a commitment.

But now the company is starting to show signs that it may be time for investors to fall in love again — which could send these shares up 100% in the coming years.

U.S. Dollar Creates Tailwinds

The company’s bottom line is starting to turn around. By next year, Avon expects to be profitable for the first time since 2011. And it’s trading at only 13.8 times those expected earnings — well below the current earnings multiple for the S&P 500 of just above 20.

I’m not expecting Avon stock to surge just because the company is finally going to be profitable, but I believe Avon will top these expectations and boost investor sentiment.

That’s because Avon is pricing in a significant negative impact from currency this year.

And, as you already know, the U.S. dollar’s strength is only temporary.

The dollar is on the cusp of a significant reversal, and once investors realize this, they will have to increase their earnings estimates for Avon.  You see, Avon generates only about 12% of revenue in U.S. dollars, while the rest largely comes from Latin America, Europe, Africa and the Middle East. This leaves plenty of room for the company’s prospects to improve as the dollar weakens.

And revenues are already showing signs of strong growth in local currency.

In the fourth quarter, revenues fell 12% in U.S. dollars, but rose 5% in the local currency. As the dollar reverses its temporary trend and becomes a weaker currency around the globe, that 5% rise in local currency will be even greater.

Plus, Avon has historically increased its dividend. Yes, the company cut it dramatically in 2012 as part of restructuring plans, but I believe the firm is now on stronger footing. As profits begin to flow back to Avon, look for it to get back into the habit of raising its dividend. The yield stands at 3% today, but that could easily double in the near future.

A Reversal in the Works

All of that sounds great, but it doesn’t change the fact that Avon stock has been in the dog house since 2009, well before currency was an issue.

So why is now the turning point?

For that, let’s look at the chart.

Avon Chart

I know, it’s ugly. The shares have dropped 45% in the past year, but there is still hope.

What I noticed was the strong volume (blue bars) that appeared as the share price (black line) approached a support level (green line) around $7.10 to $7.25. This is potentially a double bottom formed on a substantial spike in volume. In other words, buyers are increasingly supporting the stock at that level, indicating a possible reversal in its multi-year bear market.

Of course, nothing with the stock market, or in life, is a guarantee regardless if it appears to be the right time or not.

So even though I’m ready to make the commitment to Avon stock, I wouldn’t do so without a prenuptial agreement. Place your stops at $7 and start taking profit after a 50% gain.

Chad Shoop Sovereign Investor
Chad Shoop
Editor, Pure Income