Avon - Fallen Beauty?

While the stock market had rebounded powerfully from its October woes, as if nobody seems to think Europe poses any problem anymore, Avon AVP had sunken almost to a low not seen since it tanked in early 2009, when the world was suppose to be ended by the financial tsunami. One of the reasons that worried investors: investigations by SEC on bribery charges of foreign officials. Besides, it had also missed earnings, $0.38/share vs expectation of $0.47/share, and lowered outlook. Combination of these news sank the stock from $23/share to $19/share, almost a 20% drop in a day on Oct. 27. The stock is now trading at a level not seen since 2009 and currently has dividend yield of almost 5%, and forward P/E ratio around 10. While SEC investigation is never a good thing, one thing we learned from the Occupy Wall Street movement was that corporations never get devastated from their wrongdoing compared to their profits generated through those activities. Indeed, most foreign official bribery charges for other corporations tend to be in millions to tens of millions, except that in some rare cases might come to hundreds of millions. Unless it gets really ugly, the bribery charges are unlikely to sink the company. More worrying for Avon as a long term investment is the gradual degradation of its image and products in the US and Europe. Unlike new comers like NuSkin NU, the company does not have much must-have products that generate buzz. Management has not been able to turn this around, and shareholders might be losing patience. Fortunately, like any international businesses these days, Avon was able to find growth in the emerging markets, with plenty of room to grow further in Asia. With a slumping share price, Avon's stock will likely be sold by weak hands to shore up their investment portfolio towards the end of the year, thus keeping the stock from much upside sans major positive development. However, Avon is still a respectable business with billions in sales and room for growth in many countries. As the shares had been hovering around $30/share before its drop since July, it is not unreasonable to assume that Avon can rise back to that level if conditions do not further deteriorate and clarity surfaces for the SEC investigation. One of the things investors can do is to consider buying its Jan 2014 $25 LEAP, last traded at $1.25. There's plenty of time, more than 2 years, for this option to work, and investors would not have to worry much about short term fluctuation of the stock.