Investing is not always rational. It seems logical that you would want to buy a rising stock. This means that it is performing well and that there is reason to be confident in its future potential. Sometimes, that's the way to go.
But if the stock is already showing high gains, this may indicate that it has reached a peak. Conversely, stocks that are declining can be the key to successful bounce investing. It can be a risky strategy unless there are good reasons to believe it can make a strong return.
When a stock that has every reason to outperform declines, it's an opportunity. Alta Beauty (NASDAQ: ULTA) It's a great stock that typically outperforms the market and has amazing future potential, but it's down 19% this year. Here are three reasons to buy Fist now.
1. The differentiated model
Ulta has built itself into a beauty powerhouse by breaking all the rules. It combines luxury brands and mass brands, whereas the traditional setup has divided these two segments into completely different markets. Ulta's management recognized that stores were passionate about essential “beauty” from both segments, and that bringing them together under one roof was an untapped opportunity. It says that 66% of buyers are these enthusiasts, and that they represent 83% of total sales.
Another way they stand out is that they offer services. All other brands operate with similar models: luxury brands are sold in department stores, and mass brands are sold in pharmacies and supermarkets. Many brands have direct-to-consumer physical stores, a recent development in the world of cosmetics, and today most brands also have direct-to-consumer digital channels. None of these setups do services the way Ulta's big box stores do, and services are a core element of their model. People who come in for services, such as hair or nail design, are more likely to be disengaged from products as well. It's a flywheel effect that leads to greater loyalty and increased sales.
Today, Ulta carries hundreds of brands across demographics, in addition to its own brands, to tap into this customer, and loyal beauty spenders are its key market. Ulta has 1,375 stores nationwide and has had a successful in-store launch in select stores Goal Locations.
It had 43 million members at the end of 2023, an increase of 3 million from 2022, and these members account for a staggering 95% of sales. This provides Ulta with vast data to use in creating its agenda and the ability to understand and meet demand.
2. Make no mistake about its profitability
One factor driving Ulta stock down is its compressed operating margin. Ulta is feeling the inflationary pressure in several ways. Sales rose 3.5% from $2.6 billion last year to $2.7 billion this year in the fiscal first quarter of 2024, ending May 4, with a 1.6% increase in comparable sales. Earnings per share (EPS) fell from $6.88 last year to $6.47 this year. Operating margin decreased From 16.8% to 14.7%. Management lowered its expectations across the board.
It's important to keep in mind that Ulta carries no debt and generates consistent free cash flow. These are positive qualities that mean they are not in financial danger and are working efficiently. Declining profitability is a result of external factors, and the company is going through a difficult time.
All businesses will face challenges at different times. Investors shouldn't panic sell because of a tough quarter — or even several quarters. If the investment thesis is sound, and management effectively deals with short-term missteps, sticking with it will reward you in the end.
For new investors, challenges can create a buying opportunity. Read on.
3. Cheap price of dirt
At the current price, Ulta is trading at a very cheap price Forward 1 year price-to-earnings Under 14 group. That's a deal when put into the context of Ulta's capabilities.
This is the principle behind value investing. Value investors look for stocks that could be undervalued and are likely to rise to their true value.
Ulta is a well-managed company that has a long-term competitive advantage in its premium model targeting beauty enthusiasts. It is trading at a discount, and now is a good time to buy shares.
Should you invest $1,000 in Ulta Beauty right now?
Before you buy shares in Ulta Beauty, consider the following:
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Jennifer Seibel He has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target and Ulta Beauty. The Motley Fool has Disclosure policy.
3 Reasons to Buy Ulta Stock Like There's No Tomorrow Originally published by The Motley Fool