Worst Stock of 2018 Is Best Performer of 2019

Coty impressed the market while tracked investors were divided

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Mar 26, 2019
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Amid trade wars and worries of slowing global economic growth, the S&P 500 has yet to fully recapture the loss it suffered in the fourth quarter. But fortunes can change much faster for individual stocks.

Last year, the worst-performing stock of the S&P 500, Coty Inc. (COTY), plunged 67%, against a 6.24% decline in the index. According to the GuruFocus All-in-One Screener, the stock then soared 72.94% year to date, making it the best performer in the index, which climbed 11.62%.

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Coty Inc. is a global makeup and fashion company with an $8.44 billion market cap that owns brands like Covergirl, Adidas and Rimmel. The company’s second fiscal quarter results that included indications of a turnaround jolted the stock on Feb. 8. Coty reported that it expected to post a profit and positive free cash flow in fiscal 2019, which would be its first annual net income in two years.

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For revenue, Coty reported a 4.8% year-over-year decline to $2.51 billion. Its net loss totaled $960.6 million, reflecting impairment charges linked to its consumer beauty division, which suffered from increased competition. The segment reported a 15% drop in quarterly revenue, including the adverse impact of supply chair disruptions. Revenue declined by 4% in its professional beauty segment and rose 7% in its luxury business, driven by growth in its top brands like Gucci and Marc Jacobs.

Pierre Laubies, Coty’s CEO since November, said he would introduce a strategic plan to improve the company’s gross margins in the coming months.

“Within Coty, there are clear opportunities to improve how we run our company in order to enhance the quality of our business model, thereby giving us the time that we need to address our more strategic issues,” Laubies said. “I must stress that while we are confident that we can return Coty to a path of sustainable growth, we are also realistic that it will take time to achieve this outcome.”

Coty ended the quarter with $7.56 billion in debt on its balance sheet and $418 million in cash.

The stock’s rebound was a boon for several investors GuruFocus tracks.

George Soros (Trades, Portfolio), who has the largest Coty portfolio positioning among them, boosted it by 32.35% in the fourth quarter. He held 1.125 million shares, which accounted for 0.27% of his long equity portfolio. Lee Ainslie (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) each started a position in Coty during the fourth quarter.

Only holder

Diamond Hill Capital (Trades, Portfolio) reduced shares, chiseling 24% of its position to 4.12 million shares, or 0.16% of its long equity portfolio.

Bob Olstein’s Olstein All Cap Value Fund removed the stock from its portfolio in the latter half of 2016, citing woes in its consumer beauty business.

“The Fund also liquidated its holding in Coty Inc., as the company suffered from sluggish sales due to stiff competition in the mass-market beauty segment,” Olstein wrote in a 2018 annual letter. “The brand’s worse-than-expected results led us to question the expected duration of Coty’s turnaround efforts.”

Steven Cohen (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) also sold out of the stock.

See more best- and worst-performing stocks in the S&P 500 at the All-in-One Screener here.

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