Was The Smart Money Right About Dumping Ulta Beauty, Inc. (ULTA)?

In this article we will take a look at whether hedge funds think Ulta Beauty, Inc. (NASDAQ:ULTA) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Ulta Beauty, Inc. (NASDAQ:ULTA) has experienced a decrease in support from the world’s most elite money managers of late. Ulta Beauty, Inc. (NASDAQ:ULTA) was in 38 hedge funds’ portfolios at the end of June. The all time high for this statistics is 46. There were 46 hedge funds in our database with ULTA holdings at the end of March. 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.

In the eyes of most stock holders, hedge funds are seen as worthless, old investment tools of yesteryear. While there are over 8000 funds with their doors open at present, Our experts hone in on the elite of this group, about 850 funds. These hedge fund managers manage most of all hedge funds’ total asset base, and by monitoring their first-class equity investments, Insider Monkey has formulated many investment strategies that have historically outstripped the broader indices. Insider Monkey’s flagship short hedge fund strategy surpassed the S&P 500 short ETFs by around 20 percentage points annually since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind we’re going to check out the latest hedge fund action encompassing Ulta Beauty, Inc. (NASDAQ:ULTA).

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

At Q2’s end, a total of 38 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from one quarter earlier. By comparison, 44 hedge funds held shares or bullish call options in ULTA a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Among these funds, Select Equity Group held the most valuable stake in Ulta Beauty, Inc. (NASDAQ:ULTA), which was worth $315.6 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $70.9 million worth of shares. Two Creeks Capital Management, Chilton Investment Company, and Renaissance Technologies were also very fond of the stock, becoming one of the largest hedge fund holders of the company. 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.

Judging by the fact that Ulta Beauty, Inc. (NASDAQ:ULTA) has witnessed bearish sentiment from the smart money, we can see that there exists a select few money managers who were dropping their full holdings in the second quarter. At the top of the heap, Barry Lebovits and Joshua Kuntz’s Rivulet Capital dropped the largest investment of all the hedgies followed by Insider Monkey, worth an estimated $92.4 million in stock, and Jack Woodruff’s Candlestick Capital Management was right behind this move, as the fund cut about $52.9 million worth. These transactions are interesting, as total hedge fund interest was cut by 8 funds in the second quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Ulta Beauty, Inc. (NASDAQ:ULTA) but similarly valued. 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 values are closest to ULTA’s market value.

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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately ULTA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ULTA were disappointed as the stock returned 1.6% since the end of June (through 10/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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