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Investing: Estee Lauder stock looks attractive

Investing advice: Is Estee Lauder stock a good investment? What about American Funds' EuroPacific Growth fund?

February 27, 2011|By Andrew Leckey

Question: Can the stock of Estee Lauder Cos. keep rising?

Answer: This diversified skin-care, makeup and fragrance company has some attractive opportunities.

Known for such brands as Clinique, Aveda and American Beauty as well as its Estee Lauder line, the company recently increased its short-term profit forecast, citing the return of luxury consumers to U.S. stores and significant gains in overseas markets such as China.

In the fiscal year that ended June 30, Estee Lauder's earnings more than doubled to $478 million as sales rose 6.4% to $7.8 billion.

In the first half of the current fiscal year, profit rose about 35% on the strength of double-digit percentage growth in revenue.

In the December quarter, the company's sales rose 29% in China, 15% in its Europe, Middle East and Africa division and 9% in the U.S.

Estee Lauder shares are up 15% in 2011 after gaining nearly 67% last year, outpacing the overall U.S. stock market.

Despite the good news, concerns remain about high U.S. unemployment and the growing number of competitors selling beauty products via the Internet, TV shopping networks and non-department-store retailers. The company also must try to avoid cannibalizing sales of its existing brands with too many new products.

Analyst ratings on Estee Lauder shares consist of five "strong buy" recommendations, four "buys," 10 "holds" and one "sell," according to Thomson Financial.

• American Funds' EuroPacific Growth fund is not so nimble

Question: I am a shareholder in American Funds' EuroPacific Growth fund. I expected better. What is your opinion?

Answer: With $109 billion in assets, this fund is less nimble than many smaller portfolios. And its significant holdings in emerging markets add to its risk. Yet it has been a consistent long-term performer.

The fund focuses on buying and holding big-name stocks, but it currently has about 13% of assets in cash to be on the safe side.

The portfolio, managed by Los Angeles-based American Funds, has returned 20% in the last 12 months, ranking it below about two-thirds of funds devoted to shares of large foreign companies. But its longer-term performance — an annualized three-year loss of less than 1% and an annualized five-year gain of about 5% — put it in the top one-tenth of its category.

"This fund has a good long-term track record but has suffered of late," said Kevin McDevitt, mutual fund analyst at Morningstar Inc. He considers EuroPacific Growth a solid foreign-stock foundation for any personal portfolio because it is diversified among 300 different stocks. Its eight managers each manage a "sleeve" of the fund's portfolio, allowing them to specialize.

About 45% of the portfolio is in Western Europe, including Britain, with 29% in Asia and 5% in Latin America.

Its biggest holdings include Mexico's America Movil, Denmark's Novo Nordisk, Switzerland's Novartis and Germany's Bayer.

There is a 5.75% sales charge, or "load," on purchases of fund shares and a $250 minimum initial investment. The fund last reported that its annual management expenses equaled 0.85% of its assets.

Andrew Leckey answers questions only through the column. Write to him at yourmoney@tribune.com.

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