Legendary investor Michael Burry is known for making big bets. In fact, he became famous for being one of the first investors to recognize the 2008 subprime mortgage crisis, and he bet heavily against the housing market by buying credit default swaps on subprime mortgage-backed securities. Credit default swaps essentially act like insurance against default, so when the underlying mortgage-backed securities collapsed, Burry profited handsomely. He was later portrayed in the movie The Big Short by Christian Bale.
As such, it was quite notable when it was revealed that Burry sold off his entire investment portfolio in the first quarter, except for one stock: cosmetic company Estee Lauder (EL -0.96%). In fact, he doubled his position in the stock during the quarter.
Burry didn’t stop there, though. Not only did he sell his entire stock portfolio, but he also bought put options on Nvidia and several Chinese ADRs, including Alibaba, PDD Holdings, and JD.com, among others. By buying put options, he was betting that these stocks would decline in price.
This was likely due to the uncertainty over trade tensions and tariffs, and it’s unknown if Burry has since closed out these positions. If he covered the put options quickly, he would have made a nice profit in the market downturn.
Perhaps the more relevant thing for investors today, though, is why Burry is so bullish on Estee Lauder when he was willing to sell everything else in his portfolio and essentially bet against the U.S. and Chinese markets.
Beauty is in the eye of the beholder
For those unfamiliar with Estee Lauder, it is a global beauty conglomerate with brands across cosmetics, skincare, fragrance, and haircare. It primarily operates in the prestige segment, positioning its portfolio as a collection of high-end, luxury beauty brands. In addition to its namesake brand, it also owns Clinique, MAC, Bobbi Brown, La Mer, Tom Ford Beauty, and other brands.
Much of Estee Lauder’s struggles stem from its exposure to China and the duty-free shopping retail market. The company’s sales have slumped in China as consumer spending in the country following Covid has been slow to recover. However, these issues have been even more pronounced in its global travel retail business.
A big part of Estee Lauder’s growth strategy was selling its beauty products at airports and other duty-free shops throughout Asia and Europe that are frequented by Chinese travelers. COVID-19 threw a big wrench into this business, and Chinese travel has been slow to recover since. The company tried to pivot to China’s duty-free hub, Hainan Island, a more local area for Chinese tourism. However, Chinese consumers remained cautious, and it ended up having too much inventory in this area.
This, in turn, led to discounting, which has caused margin compression. Discounting for luxury brands can also be a big mistake, as it can devalue the brand in the eyes of consumers and alienate its core customers. It can also condition customers to want to wait to buy its products when they go on sale.
In the U.S., meanwhile, Estee Lauder has run into increased competition from newer prestige beauty brands. Brands like Drunk Elephant have built strong followings by offering trendy, ingredient-focused products that appeal to young adults and teens. Estee Lauder’s brands, meanwhile, are often viewed by younger consumers as their mom’s brand and not their own.
Image source: Getty Images.
Interestingly, prior to Q1, Burry had positioned his portfolio to benefit from a potential recovery in Chinese consumer demand. At the time, he held long positions in major Chinese e-commerce companies, including Alibaba, PDD Holdings, and JD.com, before reversing course and betting against the stocks by buying puts.
Despite his short-term actions, Burry likely still believes in the long-term recovery of the Chinese consumer. This could be one of the big reasons why he maintained and increased his position in Estee Lauder. If the current Chinese travel and consumption woes prove to be cyclical, the company’s sales and earnings could bounce back sharply.
After all, Estee Lauder still owns a solid portfolio of luxury brands that have strong global distribution. It has currently enacted what it calls a profit recovery and growth plan to transform its operating model to fund a return to sales growth and restore a solid double-digit adjusted operating margin. As part of this plan, it is also reducing costs and laying off employees.
With sales down 10% and adjusted operating income plunging 27% last quarter, the company still has its work cut out for it. The biggest area of distress was still retail travel, with organic revenue falling 28% last quarter and expected to fall even further in the current quarter. Its retail travel business now makes up just a low-teens percentage of its overall business. However, it has been able to significantly reduce its elevated inventory and believes it is in a better position moving forward.
Should investors buy Estee Lauder stock?
Trading at a forward price-to-earnings ratio (P/E) of 30 times this fiscal 2026 (ending June 2026) analyst estimates, Estee Lauder stock is not cheap on the surface. However, there has been a lot of earnings erosion in the past few years, so if it can regain some of those lost earnings, the stock could have a lot of upside from here.
There is still a lot of work the company needs to get done, but it could be a stock worth considering for patient investors. Burry has a great track record, so I would not bet against him.
