What Happened:

Shares of personal care company The Honest Company (NASDAQ:HNST) fell 7.5% in the afternoon session after the major indices declined (Nasdaq -2.6%, S&P 500 -1.6%). Markets are likely bracing for increased volatility ahead of the Fed's policy decision in September (2024). The consensus expectation is for the Fed to cut rates by 25 basis points to 5.00% - 5.25% during the September 2024 meeting. This will be the first rate cut since the committee began raising rates to tackle inflation. Historically, September has been a challenging month for most assets. Notably, since the post-World War II era, major stock indices have consistently recorded significant losses in the month of September relative to other months.

Additional data  to consider amidst the volatility include the labor market report to be released in the first week of September, and the CPI report the following week. Given the historical trends and upcoming Fed policy decision, investors may need to prepare for continued market uncertainty and potential downside risk in the weeks ahead.

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What is the market telling us:

The Honest Company’s shares are quite volatile and over the last year have had 58 moves greater than 5%. In context of that, today’s move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.

The previous big move we wrote about was 25 days ago, when the stock  gained 24.5% on the news that the company reported a "beat and raise quarter." The Honest Company blew past analysts' gross margin expectations this quarter, and its revenue outperformed Wall Street's estimates.

Notably, the top line outer romance was powered by strong demand for its baby products and wipes portfolios. Given the solid results, management expects full year revenue growth guidance to be in the mid to high single-digit percentage range (vs previous guidance of low to mid single digit). Adjusted EBITDA guidance was also raised to $15 million to $18 million (vs. previous guidance of low single digit to mid single digit million range). Zooming out, we think this wasn't a perfect quarter, but it was certainly a solid one.

The Honest Company is up 37.5% since the beginning of the year, and at $4.39 per share it is trading close to its 52-week high of $4.67 from August 2024. Investors who bought $1,000 worth of The Honest Company’s shares at the IPO in May 2021 would now be looking at an investment worth $190.65.

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