Forget leprechaun beauty, the new Warren Buffett stocks and low-dividend stocks are better now.

Elf Beauty (ELF -9.65%) was a standout in an otherwise challenged cosmetics industry. Shares of the cosmetics maker have risen 382% over the past three years, while two industry peers — The ultimate beauty (ULTA 1.05%) and Estee Lauder (HE -2.85%) — are low during that period.

of Warren Buffett Berkshire Hathaway just initiated a position in Ulta Beauty earlier this year, sparking a rally in the stock. But it has since sold off after reporting disappointing earnings and guidance. Meanwhile, Estée Lauder’s stock has fallen so far now that the stock is now yielding an impressive 2.9%.

Here are the key differences between all three cosmetics companies and why investors may want to consider Ulta and Estée Lauder over elf Beauty right now.

Image source: Getty Images.

The growth game

Elf Beauty (which stands for Eyes, Lips and Face) started out offering $1 cosmetics online before gaining a foothold at Aim in 2005. Since then, it has expanded its product line, improved its quality, raised its prices, and grown its network of national and international retailers, which now includes WalmartUlta and more. Over the past 20 years, elf Beauty has established an enviable foothold in the value niche of the cosmetics industry.

Shares are up about 10 times their initial public offering price less than eight years ago. In that time, it has gone from a market capitalization of less than $1 billion to a figure that is now about half that of Ulta and a quarter that of Estée Lauder. Elf Beauty deserves a lot of credit for choosing a marketing strategy that aligns with its affordable product lineup. The company does not focus on hair care or fragrances, but rather on skin care and makeup.

Sales have grown more than 300% over the past five years, and operating income has grown more than fivefold. By comparison, Ulta has seen respectable growth, while Estee Launder’s sales are flat and operating income is down. Trailing 12 month sales for elf Beauty are now over $1.13 billion, while operating margin is 12.3%, showing that the company can expand while maintaining profitability.

As great as elf Beauty’s results have been, there are concerns that growth is slowing, which is why the stock has fallen 31% over the past six months. It’s a much bigger company today than it was a few years ago, which means it can’t rely as much on awareness and first-time buyers.

To justify the price increases, elf Beauty needs to demonstrate that its products can go toe-to-toe with drugstore equivalents such as L’Oréalit’s Maybelline. This is a different selling point than when elf Beauty was based only on discounted cosmetics.

With a forward price-to-earnings (P/E) ratio of 42.5, elf Beauty is priced for perfection and will be under pressure to live up to investors’ lofty expectations.

The value game

By comparison, Ulta Beauty stock is in the bargain bin, with a forward P/E of just 15.1. Plus, Ulta’s business model is totally different from elf Beauty’s. They offer brick-and-mortar stores and offer a variety of products, including branded and private label cosmetics, fragrances, hair care, bath and body products, and more.

ELF PE report (forward); data by YCharts.

The company also offers in-store services to give customers another reason to shop in person. Ulta appeals to a broad customer base by offering various categories of products at different price points.

On its recent earnings call, management cited a number of challenges, including reduced foot traffic, normalizing growth after years of gains, consumers moving toward value, lower market share in prestige beauty and competition. CEO David Kimbell said on the second quarter earnings call:

What is unique in today’s environment is the scale and pace of change. Over 80% of our stores have been affected by one or more competitive openings in recent years, with more than half affected by multiple competitive openings. This significant part of our store fleet is experiencing a prolonged impact on sales.

Although growth is slowing, the company is still very profitable. Its proven business model and very cheap valuation make it a universal way to play a rebound in consumer spending and premium cosmetics.

The return game

There’s no sugar coating that Estée Lauder stock has been a train wreck in recent years. It rallied 185% between 2019 and the end of 2021 only to give up all those gains (and then some) since then. This epic collapse has to do with its business model.

The company covers every category in the beauty industry, including skin care, makeup, fragrances, hair care, candles and soaps. It has a variety of established brands, including its flagship Estée Lauder, as well as Clinique, Origins, M·A·C, Bobbi Brown, La Mer, Aveda and more.

The company has increased its presence in e-commerce, but still relies heavily on luxury retail outlets, department stores, salons and spas, airports and duty-free locations. The product mix, when paired with its distribution strategy and its big bet on China, made Estée Lauder particularly vulnerable to a downturn in consumer spending. And as Ulta said in its recent earnings call, premium-priced products are seeing a noticeable drop in demand as consumers cut back on discretionary spending.

When Estée Lauder is at its best, it’s a high-margin cash cow that can fuel earnings and dividend growth. Lower interest rates and a rebound in discretionary spending could trigger a significant turnaround in its performance. However, the company’s marketing strategy is in desperate need of a facelift, so it will take a lot more than favorable economic indicators to return to growth.

Buying the stock now is a bet on what the company can do with its highly valuable portfolio of brands, not what it’s doing today.

The good news is that he only needs to return to pre-pandemic form (not even his peak performance during the pandemic). If it does that, the stock will look incredibly cheap. Meanwhile, Estée Lauder’s dividend yield of 2.9% provides an incentive to hold the stock during this volatile period.

Ulta and Estée Lauder deserve a closer look

Expectations and context are vital concepts in investing. Given years of breakout results and an expensive valuation, investors clearly have high hopes for Elf Beauty. The business has undoubtedly benefited from consumer trends towards value products.

Similarly, Ulta Beauty and Estée Lauder are experiencing slowing or even negative growth. Ulta fared better because of its balanced product offering. Instead, Estée Lauder struggles with a bloated business model that relies heavily on international travel and in-store sales of premium products.

Now elf Beauty needs to prove it can succeed as a more established company at a slightly higher price point. Ulta stock is arguably the best overall buy right now because of its cheap valuation and balanced business model. However, investors should continue to monitor the company’s concerns about competition from other brick-and-mortar stores and the constant threat of Amazon.

Estée Lauder is a good choice for income-focused investors or those confident that it can revamp its marketing strategy and unlock margin expansion through online sales. If the company makes the necessary changes, it could be a compelling comeback play. However, some investors may want to see concrete evidence that Estée Lauder is headed in the right direction before hitting the buy button.