I Think We’ll See This Stock Rally Soon

My favorite stocks are the ones that grow at solid clips, have strong franchises and boast good fundamentals to keep them moving higher over time.

Ulta Beauty Inc (NASDAQ:ULTA) fits this criteria nicely, and it’s why I think we’ll see it rally soon despite its recent choppy trading.

Before I explain why, let me give you a quick recap of what the company does.

Ulta Beauty is the largest beauty retailer in the United States, selling cosmetics, fragrances, bath and skincare products and hair care.

Each location also houses a full service salon.

The company operates 990 stores in 28 states, with 90% outside of malls, which therefore limits its exposure to declining traffic.

Management believes there is potential to grow their store base to 1,400-1,700, giving the company significant room for expansion.

In addition, the beauty industry is fragmented, and since ULTA only has 4% of market share it has ample opportunity to take share from competitors.

The stock initially fell under pressure due to concerns about discounting by department stores in cosmetics. There were also growing doubts that meaningful tax reform will pass, which had previously benefited the shares.

Fears of an increasingly competitive environment along with changes in consumer behavior have hurt retailers all year. I think these issues are unfairly holding ULTA back.

I don’t expect the stock to be pressured forever, since the company is able to provide a unique consumer experience with a wide selection of products and services that cannot be completely supplanted by price. In addition, its valuation is becoming more attractive.

Earnings Are the Makeover ULTA Needs

In fact, the shares began to find their footing thanks to news that director Charles Heilbronn bought $24.97 million worth of stock during one of the company’s slumps in mid-October.

I view this as an extraordinary vote of confidence, and while ULTA may feel some pricing pressure when it releases earnings results in a few weeks (its quarter wrapped up at the end of October), this is a sign that management is confident that they can manage any industry challenges thrown their way.

In addition, the stock is already discounting a good deal of slower growth even though comparable store sales increased 10% last quarter. The shares may chop around until the earnings results are out, but they should be in for a good rally after and be able to close out 2017 on a high note.

If you’re looking for a steady growth investment, ULTA could add just the right amount of sparkle to your portfolio, but time is running out to buy this beauty stock at a discount.

— Hillary Kramer


Source: Investor Place