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Avon – Highly Speculative and Some Trade Accountability

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Last week on fast money I recommended Avon ticker ( AVP , quote ) as my final trade as my thoughts into (yesterday's)earnings were this was a company that was slowly but steadily reversing years of poor client focus, getting more efficient, and slowly moving down the road on settling onerous Federal bribe charges and potential SEC penalties as well.

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I believe that CEO Sheri McCoy is overseeing a turnaround that will be steady if not spectacular and this is some of the cheapest exposure to the emerging market middle class consumer relative to other global emerging market (GEM) players who have had a tremendous 3yr run. I was very wrong on my timing. Yesterday the stock traded down -21.9% on monster volume (about 20X avg 30d vol).

Yesterday Avon released third-quarter numbers that fell short on the sales line primarily in North America but the headline grabber was that the SEC was threatening larger than expected penalties to reconcile a long running bribery probe.

With the move in the stock you are now back to levels where the stock traded before ripping 20% higher on fiscal 4Q earnings. You are also at key support level that goes back to Dec '11.

While the company appropriately used words like "material" to describe the Federal and SEC penalties they are facing, Avon is a $7.6 billion (even after yesterday's plunge) with $2.3 billion in revenues last quarter. Solvency is not the issue.

When analyzing Avon after yesterday's move know that a cheap stock got cheaper. Avon's multiples ( 9.2 times 'e13 PE and 0.92 X P/S) are major value relative to the broader GEM consumer space. And while North American sales were disappointing and overall sales in the main beauty business were -9%, the company has been enormous upside leverage to consumers outside of North America and this growth path is where the company is focused.

More than 80% of the company's revenues come from outside of North America. Latin America is more than 50% of sales.

It's still too early in Sheri McCoy's turnaround plan to determine whether she is broadly succeeding in turning around Avon but this is what we like to call a transformational story where there could be a long term structural investment call...IF, you believe they can get past the regulators. The core business is well positioned.

With the caveat that this is a company with significant risks around it, this is a position I would add to at these levels.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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