Honest Company (HNST) Remains Volatile Following Recent IPO

IPO, Options, Volatility

Honest Company (HNST), the consumer goods brand founded by actress Jessica Alba, is a recent initial public offering (IPO). HNST began trading in early May after the company sold 25.8 million shares at $16 each, raising roughly $413 million.

In its first day of action, HNST’s stock opened at $21.22, with the high hitting $23.88 and the closing price at $23. Shares have been volatile since then, and tapped a low of $14.54 in late May, following the debut peak.

Honest sells its goods, such as non-toxic household products, diapers and wipes, and vitamins, on its website as well as through its strong U.S. retail partnerships with Costco, Target and Walmart. Diapers and wipes make up its largest segment, comprising 63% of its business model.

As far as the financials, Honest reported sales were up nearly 30, to just over $300 million, in 2020, but the company posted a loss of nearly $15 million. Moreover, losses are expected to continue into this year.

There had been little analyst coverage of the stock since its IPO debut, but that has started to change. Four Wall Street firms initiated coverage at the start of June; giving the stock one overweight rating, one buy, one outperform, and one hold. Price targets ranged from $17.50–$19.

Analysts seem to agree Honest represents a strong growth story and a robust following, with sales growing at an annual rate of roughly 15%. But the growth rate could be a little conservative, as Honest seems well-positioned to benefit from faster growth in its business segments as customers become more conscious of what they buy and what goes into a company’s products.

Honest will likely give its first earnings update in July; this will provide a better picture of the current quarter, along with an outlook for 2021. Given the short nature of earnings updates and the technical setup, shares remain volatile.

The chart below shows key resistance near the $20 level with short-term support at $17. A close above or below these levels could lead to a retest towards $21–$23, or a back test towards $16–$14.

HNST stock chart 06/07

Options are also listed on the stock, with monthly calls and puts available to trade for June, July, August, and November; however, the bid and ask prices have larger spreads than most stocks, so it’s best to use limit orders when deciding on a possible bullish or bearish trade.

While it can be exciting to get in on a recent IPO on a company with high brand visibility and a loyal following, it might be best to take a wait-and-see approach when it comes to investing in Honest. At this stage, there seems to be more risk than reward, at least until the numbers start to roll in and a more thorough analysis of the chart can be performed.

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