Honest Company Stock: Why You Should Avoid It After the IPO

Honest Company stock almost went public before. Ironically, a lack of honesty put it on hold.

The Honest Company, founded by actress Jessica Alba, billed itself as "clean and sustainable," and then it was found not to be so.

Five years later, it will trade on the Nasdaq under the ticker symbol "HNST."

The company said on April 26 (Monday) that it would shoot for an IPO valuation of $1.5 billion, offering over 25 million shares in the range of $14 and $17.

But is Honest stock more of a buy today than it was then?

Things are always more than they appear. You'll want to know if this company has cleaned up its act in the last five years or still plans to rely on a celebrity face to sell its product.

Let's find out if The Honest Company is as honest as it says yet...

What Is The Honest Company?

Actress Jessica Alba founded Honest Co. after the birth of her first baby in 2008. It vowed to use natural, organic, or "clean" products instead of the artificial chemical-infused junk lining most shelves.

In addition to baby food, Honest sells consumer goods like lotions and detergents. The company plans to expand internationally, so a capital infusion from something like an IPO is useful to that end.

Founded by actress Jessica Alba, The Honest Company operates in the market for "ethical" consumer goods.

The company leans on four "pillars" in making its products: clean, sustainable, effective, and thoughtfully designed.

As a result, the company excludes as many as 2,500 commonly used chemicals from its ingredients. The ingredients it uses are said to be "sustainably sourced" or recycled.

The effort is about more than just "clean" ingredients, too. Honest also aims for "carbon-neutral" deliveries to offset greenhouse gas emissions.

Currently, its business is in the United States and Canada, with its eyes set on the Asian market in the future.

There is a big trend toward natural, sustainable products in the market, which drives investing in companies prioritizing environmental, social, and governance (ESG) needs.

Eighty-four percent of Americans say they buy organic foods "sometimes." U.S. retail sales of organic produce have gone from around $35 billion in 2013 to $45 billion in 2020.

Ten billion dollars in less than 10 years is no too shabby. Makes you think an ESG stock is the thing to be these days.

But watch out...

Problems Being Honest

The Honest Company already wanted to go public in 2016. Right then, it was hit with a lawsuit over misleading advertising.

Some of Honest's products contained an ingredient that it had sworn not to use. Specifically, detergents, cleaners, and soaps were marketed as not containing sodium lauryl sulfate (SLS) when they in fact did.

In fact, The Wall Street Journal published tests citing "significant amounts" of the chemical.

The company fought the charges on a technicality, saying that the chemical found was a slightly different, less-irritating, safer chemical. They used "sodium coco sulfate" (SCS), not SLS.


These 19 popular stocks are like poison for portfolios - if you own these stocks, drop them immediately.


These 19 popular stocks are like poison for portfolios - if you own these stocks, drop them immediately.

That, however, was also proven misleading from a chemistry perspective by the WSJ, since the "safer" SCS was said to always contain SLS, though they are not one and the same.

Well, good news: They fixed it in a $7.3 million settlement.

This, occurring in 2017, put off the Honest IPO plans around the same time. Now, the company will attempt to go public again.

If the Honest Co. stock price is $17 at IPO, that's about $110 million in revenue for the company.

Honest hopes to use the money for more marketing and expanding its product line.

Now, if you're not clear on whether Honest Company stock is a buy, read here...

Should You Buy Honest Stock?

The Honest Co. already had a couple brushes with dishonesty. So, the brand could still struggle to carry out its intended vision.

It also participates in an extremely competitive industry. Consumer goods includes some of the biggest companies on the planet, like Johnson & Johnson (NYSE: JNJ) and Nestle (OTCMKTS: NSRGY).

Even in the "clean" and "ethical" consumer goods space, it has some fierce competition, like Ecover, Dyper, and FirstCry.

It's a great pool of competitors, many of them with significantly more capital than Honest Co.

So, there are significant competitive moats to overcome, especially with giants like Estee Lauder and Loreal selling products in the same categories. We're talking years of product development and adoption.

It would honestly be a miracle if The Honest Company wins in this market. Even if it did not have a shady lawsuit five years ago, there would be concerns.

But past management questions leave little doubt that Honest Company is a stock to avoid.

IPOs in general can be risky, as the prices are inflated initially due to massive institutional buying. High IPO prices often crash when the hype is over.

This is likely to happen with Honest Co., if it gets any hype at all.

The Honest IPO date is yet to be announced. But if you're only attracted to the glitz and glam of celebrity and sustainability buzzwords, now would be a great time to break that spell.

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About the Author

Mike Stenger, Associate Editor for Money Morning at Money Map Press, graduated from the Perdue School of Business at Salisbury University. He has combined his degree in Economics with an interest in emerging technologies by finding where tech and finance overlap. Today, he studies the cybersecurity sector, AI, streaming, and the Cloud.

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