I know next to nothing about cosmetic and skincare products.

I couldn’t tell you the difference between Primer, Base, and Blush. And the only reason I know those are real things people use is because I looked them up when I came across the stock I’m going to tell you about.

And while I may not know a thing about skincare products, or makeup, or any of that stuff, I do know that women love them. My wife’s side of the bathroom looks like you’ve walked into an Ulta Beauty (although I’ve never been in one).

But the truth is, my lack of knowledge about these things doesn’t really matter. As my colleague Nathan Slaughter recently wrote, investing legend Peter Lynch would often get his best ideas from taking his daughters shopping at the mall and following them around. He would then find out more about the company; sometimes, it would pay off big-time.

A Surprising Growth Story

Turns out, a couple of gentlemen also noticed that women loved their lipsticks and nail polishes. In fact, Scott Vincent Borba (one of the co-founders of this pick) said that he was always shocked as he drove by the 99-cent stores in Los Angeles, California, and the parking lot would be packed with BMWs and Mercedes.

Inside, women with obviously expensive tastes were buying bargain-price cosmetics. He knew there was a major market here.

So Borba teamed up with Joseph Shamah and launched a beauty line that offered inexpensive, high-quality cosmetics. They called the company “EyesLipsFace.” Better known as e.l.f. Beauty (NYSE: ELF).

Headquartered out of Oakland, California, Elf Beauty has ballooned into a nearly-$3-billion company. You’ll find its products in Walmart, Target, and Ulta Beauty. The company also has a robust e-commerce platform. The company’s mission is to provide clean, cruelty-free cosmetics and skincare products. It offers what it calls “premium quality at unbelievable prices.” It has also partnered with the famous music artist Alicia Keys, which the company has branded as Keys Soulcare.

The company created a massive and loyal following as it launched a community where members could share tips, watch educational videos, and learn new makeup techniques. The company has nearly 600,000 followers on TikTok, 6.2 million followers on Instagram, and 109,000 subscribers on YouTube.

Again, you don’t have to be a young person or some social media guru to understand how significant this is.

Inside The Numbers

This massive community helped drive sales north of $392 million last year, a 23% year-on-year growth. This year, the company is on track to do $489 million in revenue, which would represent growth of roughly 25%.

Elf Beauty has been profitable since it became publicly traded in 2016. In its most recent quarter (three months ended September 30, 2022), the company posted a net income of $$11.7 million, a 104.6% growth over the same quarter a year ago.

Management has done well at keeping a healthy balance sheet. Elf had $85.3 million in cash on hand compared with total debts of $112 million. Of which only $10 million is short-term obligations.

Looking at cash flow, the company generated $12.5 million in its latest quarter, which was a huge improvement over the $6.7 million loss it had the year prior. Through its first two quarters of fiscal 2023, Elf Beauty has already generated over $43 million in cash flow. That’s more than the $19.5 million it had all of last year.

Is It A “Buy”?

Shares jumped higher after the company reported its latest quarterly results on November 2. As you can see in the chart below, the stock had already been making new highs prior to the earnings release but surged higher on strong volume after the results were announced.

There are some risks to consider, though. Most notable is that Walmart, Target, and Ulta Beauty accounted for 26%, 23%, and 12%, respectively, of the company’s net sales. That’s a high customer concentration, and should any one of those retailers cut back sales of Elf’s products, that would devastate shares.

But I like that Elf seems to operate in a good niche — offering a quality product at lower prices. It also helps that it’s generating a strong following, which should go a long way to help sales hold up if consumer spending slows down.

If you’re looking for a small-cap stock with a good bit of upside, consider looking at ELF.

P.S. I recently found an under-the-radar tech stock that could be one of next year’s big winners…

The company is involved in several massive tech trends: the Internet of Things, satellite technology, 5G, communication, and more…

And the good news is that right now it’s completely unnoticed by the market. That makes it a perfect setup to make investors a lot of money in the coming months. Go here to learn all about it now.