Is Ulta Beauty, Inc. (ULTA) A Good Stock To Buy?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Stocks kept going up since then. In this article we look at how hedge funds traded Ulta Beauty, Inc. (NASDAQ:ULTA) and determine whether the smart money was really smart about this stock.

Ulta Beauty, Inc. (NASDAQ:ULTA) shareholders have witnessed a decrease in enthusiasm from smart money recently. Ulta Beauty, Inc. (NASDAQ:ULTA) was in 38 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 46. Our calculations also showed that ULTA isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 58 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are also checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Now let’s view the key hedge fund action encompassing Ulta Beauty, Inc. (NASDAQ:ULTA).

How have hedgies been trading Ulta Beauty, Inc. (NASDAQ:ULTA)?

At the end of June, a total of 38 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from the previous quarter. By comparison, 44 hedge funds held shares or bullish call options in ULTA a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

The largest stake in Ulta Beauty, Inc. (NASDAQ:ULTA) was held by Select Equity Group, which reported holding $315.6 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $70.9 million position. Other investors bullish on the company included Two Creeks Capital Management, Chilton Investment Company, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Cloverdale Capital Management allocated the biggest weight to Ulta Beauty, Inc. (NASDAQ:ULTA), around 4.54% of its 13F portfolio. Two Creeks Capital Management is also relatively very bullish on the stock, designating 4.29 percent of its 13F equity portfolio to ULTA.

Because Ulta Beauty, Inc. (NASDAQ:ULTA) has faced declining sentiment from the entirety of the hedge funds we track, we can see that there is a sect of funds who sold off their full holdings heading into Q3. Interestingly, Barry Lebovits and Joshua Kuntz’s Rivulet Capital dumped the biggest position of the “upper crust” of funds monitored by Insider Monkey, valued at an estimated $92.4 million in stock, and Jack Woodruff’s Candlestick Capital Management was right behind this move, as the fund dropped about $52.9 million worth. These moves are interesting, as aggregate hedge fund interest fell by 8 funds heading into Q3.

Let’s check out hedge fund activity in other stocks similar to Ulta Beauty, Inc. (NASDAQ:ULTA). We will take a look at Kirkland Lake Gold Ltd. (NYSE:KL), Enel Americas S.A. (NYSE:ENIA), Apollo Global Management Inc (NYSE:APO), Dynatrace, Inc. (NYSE:DT), Teledyne Technologies Incorporated (NYSE:TDY), Black Knight, Inc. (NYSE:BKI), and Halliburton Company (NYSE:HAL). This group of stocks’ market caps match ULTA’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.4 hedge funds with bullish positions and the average amount invested in these stocks was $799 million. That figure was $662 million in ULTA’s case. Black Knight, Inc. (NYSE:BKI) is the most popular stock in this table. On the other hand Enel Americas S.A. (NYSE:ENIA) is the least popular one with only 12 bullish hedge fund positions. Ulta Beauty, Inc. (NASDAQ:ULTA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ULTA is 62.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Hedge funds were also right about betting on ULTA, though not to the same extent, as the stock returned 14.1% since the end of June and outperformed the market as well.

Disclosure: None. This article was originally published at Insider Monkey.