Investors shouldn’t rely entirely on outside recommendations for their stock buys, even if those doing the recommending are financial professionals. That said, when stock analysts change their views on a company, it can have an immediate and sometimes lasting effect on its shares.
That goes a long way to explaining the more than 16% decline of The Honest Company‘s (HNST -0.90%) stock in December. The drop can also be attributed to a pullback in market sentiment, as the shares were on quite a run before that month.
Coal in the stocking from an analyst
In the middle of the month, Loop Capital’s Laura Champine downgraded her recommendation on The Honest Company to hold; previously she had tagged it as a buy. She didn’t, however, modify her price target, which remained steady at $7 per share.
According to reports, much of Champine’s new view on the company is due to the significant ballooning of its share price. She pointed out that, at the time of her downgrade, The Honest Company had more than doubled, increasing 120% year to date.
The analyst has concerns about the company’s fundamentals, too. She said that one of the main ones is potential tariffs on China from the incoming Trump administration. The company’s popular line of baby wipes is made there, and sharply increased costs for shipping them to the U.S. could be damaging. In her view, shifting production to U.S. suppliers is not a viable option.
Champine’s update wasn’t all gloom and doom, however, as she pointed out several positive factors in The Honest Company’s business. A major one is the company’s relationship with monster retailer Amazon, through which it does brisk business. She wrote that in The Honest Company’s third quarter, for example, its sales through Amazon grew by 19%.
Capturing the spirit of the age
While I understand the worry behind a sharply climbing stock price, I don’t necessarily think The Honest Company is overvalued. Consumers are increasingly demanding all manner of personal care goods be made with “cleaner” ingredients and fewer harmful chemicals, so this business feels like it has a smart go-to strategy that’s effectively capitalizing on this Zeitgeist.
Collectively, analysts like Champine who track the stock are expecting revenue growth of almost 9% for 2024 over the previous year, with a slowdown to less than 6% for 2025. This feels quite conservative to me, particularly given the Amazon dynamic, so I wouldn’t be surprised to see a markedly better-than-expected performance here.
Profitability is a bit of a stickier issue, as The Honest Company has a string of bottom-line losses in its history. While I’m bullish on its prospects, still I’d like to see it prove it can more consistently land in the black.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
