The Contrarian Blog
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Publication: "CNN Money"
Publication title: "Avon banking on new CEO for change"
Publication Date: 4/9/2012
Brief Summary:

The article seems to maintain a cautious outlook for Avon Products, Inc. (AVP) in light of the company's recent headlines. Specifically, the struggling cosmetics maven was recently the target of an unsolicited, $10-billion buyout bid by Coty, whose takeover offer was part of a strategic effort to expand its own product line beyond the fragrance market. AVP promptly rejected the bid, sending the shares soaring by almost 18%. As one investor commented, "The Coty approach was an indication if investors didn't see the value then someone else did."

However, investors were less enthusiastic about AVP's latest announcement that it has appointed former Johnson & Johnson head honcho Sherilyn McCoy as its new CEO. While the article notes that securing someone of her caliber bodes well for AVP, analysts are concerned that a significant turnaround could be slow going -- particularly if the company stays independent. The author also points out that AVP has struggled to meet earnings and revenue forecasts for more than a decade, and has lost profits due to litigation costs accrued during two Securities and Exchange Commission (SEC) investigations. The article concludes that analysts and shareholders alike are waiting to see if Coty will up the ante with a better offer, thus giving AVP an additional leg to stand on.

Contrarian Takeaway:

AVP has been a technical standout lately, boasting a year-to-date gain of about 30%, and besting the broader S&P 500 Index (SPX) by over 26% during the last two months. Thanks to the bid-related rally on April 2, the stock is now trading comfortably above its 200-day moving average, a trendline that had been largely out of reach since last July.

However, there still seems to be a fair amount of negative sentiment lingering toward AVP. Currently, the equity's April and May series of options hold a glut of put open interest -- particularly at the April 22 strike, which is home to peak put open interest of nearly 6,700 contracts. Moving forward, this area could translate into a layer of options-related support.

What's more, only four of the analysts following AVP have issued "buy" or better endorsements, while the remaining nine maintain tepid "hold" ratings. Also, Thomson Reuters pegs the equity's average 12-month price target at $24.10, which is just a slim premium to the stock's current perch. This leaves plenty of room for future upgrades and/or price-target hikes, which could provide an additional tailwind for AVP.

Considering AVP's newfound technical strength, speculators may end up reconsidering their bearish stances on the stock down the road. However, the article's cautious wait-and-see approach seems appropriate, given AVP's previous struggles as a stand-alone company.

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