Good morning! There’s nothing better than starting a week with news of Warren Buffett shuffling his portfolio.

When Berkshire Hathaway buys or sells a certain stock, it’s worth paying attention.

Let’s get started.

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Buffett’s play on the lipstick indicator

Warren Buffett seems to have heeded his own advice in the second quarter. 

The stock at hand is Ulta Beauty.

On Wednesday, Berkshire Hathaway revealed in a regulatory filing that it purchased 690,106 shares of the cosmetic brand in the second quarter, worth about $266 million. 

Shares of Ulta Beauty have climbed about 15% since Buffett’s conglomerate disclosed its position.

Similar to Sephora, Ulta Beauty is a make-up retailer that sells cosmetics at a broad range of prices. Both stores allow customers to sample products without asking an employee for help like you’d have to do in a department store. 

The underlying business seems just as enticing.

BMO data cited by the Wall Street Journal shows Ulta has nearly 15% operating margins. Plus, its top-line growth rate has compounded at 11% annually for the last five years. 

That said, investors haven’t given the stock much attention this year. In March, Ulta executives missed Wall Street earnings expectations and the stock has struggled ever since. 

Even with the Berkshire-fueled rally last week, Ulta remains down 22.5% in 2024.

In any case, what makes Berkshire’s bet on Ulta intriguing is how it’s arrived in the thick of recession fears. 

Specifically, it’s made me think about the so-called lipstick indicator.

The concept suggests consumers will buy more affordable luxury items — like lipstick — during economic downturns and when money is tight.

Whether we’re in one already or if one’s waiting around the corner is anyone’s guess. Volatility looks tamer now than in July, but with a presidential election and Fed policy decisions looming that could change in an instant. 

It was only a couple weeks ago though that economists were panicking and calling for emergency policy action. 

To be clear, the lipstick indicator is more anecdotal than scientific. Legend has it that Estée Lauder's chairman Leonard Lauder said in 2001 that he observed rising lipstick sales during recessions.

Some economists have noted that the rule is hard to prove, given the limited historical data surrounding lipstick. 

Either way, there’s something notable about history’s greatest investor betting on a cosmetic company right as recession jitters return to markets.

Lipstick indicator aside, that is not nothing. 

Comments or feedback? Hit reply to this email or let me know on X @philrosenn.

Elsewhere:

🎙️ Jerome Powell returns to Jackson Hole. During a relatively tame week of economic data, the Fed Chair is expected to speak Friday at the economic summit. Investors expect him to shed light on the size of an imminent September rate cut, and what could happen through year-end.

🏠️ Housing demand can change faster than supply. On Friday, Kamala Harris proposed a plan to increase new home construction while also juicing demand with a government-funded $25,000 payment assistance for first-time homebuyers. But giving millions of homebuyers a stipend could lead to a spike in demand that outpaces any supply relief from new construction — and ultimately make housing affordability worse. (ResiClub)

🤖 The biggest companies are cautious on AI. A new study found more than half of Fortune 500 groups see the budding technology as a potential hazard to their business. The 56% reading is a sharp jump from the 9% seen in 2022. Over the last two years, Big Tech companies have invested billions of dollars into generative AI systems and language models. (FT)

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