Was I right to sell ELF?

For those of you who haven't heard of it, Elf Beauty is a cosmetics and skincare company. It's products are predominantly sold online and in the USA, although they do have some international sales, as well as a presence in retail stores. They have a small market share in both the skincare and cosmetics markets, but it is growing rapidly. The forecast for 2024 sales is 37-39%. They have a PE ratio of 52 though, and have risen around 100% this year. I brought into Elf not that long ago, on the assumption that I was making a momentum trade, and that their growth would continue. While I think it is likely that Elf's growth may continue, there were a few reasons why I sold;

The first is their volatility. They have a beta of 1.52, which means that their volatility is 50% greater than that of the stock market index, which has a lot of stomach churning volatility anyway. It fell by around 9% a couple of days after I brought it. This is common with growth stocks. People (like me) get drawn to their high sales growth, and buy shares after they have already made a big run, this drives up their price to a temporarily unsustainable level, and the smart money sells. The price will then go down to a more sustainable level, where it will consolidate and prepare for its next big run. Anyway, I ended up selling out of Elf for breakeven after its price had finished consolidating and made another run. I may regret selling because its share price may continue shooting to the moon, I don't know. But what I do know, is that I would rather not deal with the volatility.

Another reason is their focus on Gen Z consumers, and social media marketing. Don't get me wrong, these characteristics have led to extraordinary success, generating 76% revenue growth in the prior year. But Gen Z consumers are very fickle, and their tastes can change at a moments notice. And Elf Beauty's predominant social media of choice is Tiktok, which of course is owned by China. There have been rumours for the past year that the US Government might ban Tiktok from operating in the USA. This was actually the reason why I didn't buy Oracle earlier this year, because they operate the software servers that Tiktok uses in America. Tensions between China and the USA have been getting increasingly frosty in the past year. Were China to invade Taiwan, Tiktok is definitely getting banned in the USA, and Elf will lose its main source of advertising.

The other reason I sold pertains to my wider portfolio. Last week I made a list of all the stocks I am happy with and would like to keep, and all the stocks I am unhappy with and would like to sell at a certain price point. Jim Cramer often speaks about how in his hedge fund days, he made the best returns when he focused on a concentrated group of stocks. Warren Buffett has said many times, that over diversification is only a protection against ignorance. Even Berkshire today has 40% of its portfolio in one stock i.e. Apple. When I added it up, I had 29 stocks and ETFs altogether. This is just too much in order to keep on top of the developments of the stocks and ETFs I own. So I have chosen the stocks I will concentrate more into, and Elf was not one of them. So when the market next has a pullback I will buy more of maybe Berkshire or Realty Income.

So it was a combination of these reasons that I decided to sell. You need to be able to keep on top of what you own, and if you can't its better to concentrate a bit. You also need to know what type of investor you are, whether you want to trade in and out of the market, or passively own an Index ETF. I think I sit somewhere in the middle.

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