Every once in a while, the stock market becomes severely disconnected from a company's true value and fundamentals, as the stock price reflects a widening disconnect between that company's true value and what the market's feelings dictate the price is today. In other words, value investors often sit on cash reserves, waiting for these big disconnects between price and value.
As the market starts to rotate out of the high-flying stocks in the technology sector, particularly those dealing with artificial intelligence like NVIDIA Co. (NASDAQ: NVDA), worrying sentiment has also had a contagion effect in other areas. Today, investors can find the latest value deal in shares of Ulta Beauty Inc. (NASDAQ: ULTA), which recently hit a new 52-week low price on nothing but a broader market selloff.
Often, investors can justify a stock's bearish price action by tying it to some development in the company's financials. Still, when that connection can't be made, it could be time to consider a potential investment in what could turn out to be a discounted asset. Here's why Ulta stock might fit that category.
Why Ulta Stock is the Ideal Hedge in a Declining Market
It has nothing to do with the stock's price, which has become painfully apparent for investors holding onto the name today. However, for those savvy enough to stick to the fundamentals despite what the market is doing, here are some pointers to lean on during this volatility.
First, most think that Ulta stock is part of the consumer discretionary sector, but that is just not accurate. Skincare and beauty products are more part of the consumer staples sector, as it doesn't matter whether the economy is booming or busting; people will likely always make room in their budgets for these products.
Second, Ulta's financials can give a new sense of safety to those primarily focusing on numbers when making a potential investment decision. Gross margin rates of over 42% will place Ulta above other retailer peers like Target Co. (NYSE: TGT) and its gross margins of only 27.9% today.
These high margins allow management to reinvest and manage the business's capital much better, and with a net income margin of over 11%, that job is made even easier. The efficiency of the company's reinvestment policy shows through with a return on invested capital (ROIC) rate of 29.6%, any value an investor wishes for in an investment.
Annual stock price performance tends to mirror the long-term ROIC rate when smoothed out over enough time, which is why Ulta stock has had a nearly 1,000% run since 2008 while the S&P 500 only scraped 250%. The fact that Ulta stock now trades at 64% of its 52-week high price could make the future returns a lot better for those willing to take a second look at the company.
Sticking with the fundamentals, Ulta's annual report will show investors that over 90% of the company's revenue comes from rewards membership users, a benchmark unseen in today's retail sector. Together, these factors would make Ulta stock one of the best choices for hedging against market volatility.
How Wall Street Views Ulta Stock Today
Wall Street analysts forecast up to 10.7% earnings per share (EPS) growth in Ulta stock for the next 12 months, which is impressive considering the company is $18.4 billion in market capitalization today. Driven by these EPS expectations, J.P. Morgan Chase & Co. analysts decided to boost their price targets on Ulta stock to $544 a share, daring it to rally by 47.2% from where it trades today.
But these analysts weren't the only ones on Wall Street who felt this confident about Ulta stock; those at DekaBank Deutsche (Ulta's largest shareholder) boosted their stake in the stock by 17.8% as of June 2024, bringing their net investment to $109.9 million today.
There are other ways investors can also find a reward from Ulta stock today, apart from its double-digit upside. Looking into Ulta's latest quarterly earnings results, the financial statements will tell the story.
Up to $289.4 billion was allocated to buying back shares of the market, which is one of the most efficient ways to repay shareholders. This capital is free of tax and is now tapped into the double-digit ROIC rates that Ulta generates.
What's more, management is so confident about the future of Ulta's financial strength that they have guided toward a further $1 billion in share repurchases for the rest of 2024; at that rate, management would've allocated nearly 10% of the company's market capitalization toward buying back stock, an aggressive move to say the least.
