Were Hedge Funds Right About Piling Into Ulta Beauty, Inc. (ULTA)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Ulta Beauty, Inc. (NASDAQ:ULTA) and determine whether hedge funds had an edge regarding this stock.

Ulta Beauty, Inc. (NASDAQ:ULTA) has experienced an increase in enthusiasm from smart money lately. ULTA was in 46 hedge funds’ portfolios at the end of March. There were 41 hedge funds in our database with ULTA positions at the end of the previous quarter. Our calculations also showed that ULTA isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

Gabriel Plotkin Melvin Capital Management

Gabriel Plotkin of Melvin Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. 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 gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a gander at the key hedge fund action surrounding Ulta Beauty, Inc. (NASDAQ:ULTA).

What have hedge funds been doing with Ulta Beauty, Inc. (NASDAQ:ULTA)?

Heading into the second quarter of 2020, a total of 46 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 12% from one quarter earlier. By comparison, 43 hedge funds held shares or bullish call options in ULTA a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Select Equity Group was the largest shareholder of Ulta Beauty, Inc. (NASDAQ:ULTA), with a stake worth $244.9 million reported as of the end of September. Trailing Select Equity Group was Rivulet Capital, which amassed a stake valued at $92.4 million. D E Shaw, Two Creeks Capital Management, and Citadel Investment Group 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 Rivulet Capital allocated the biggest weight to Ulta Beauty, Inc. (NASDAQ:ULTA), around 5.91% of its 13F portfolio. Two Creeks Capital Management is also relatively very bullish on the stock, designating 5.37 percent of its 13F equity portfolio to ULTA.

With a general bullishness amongst the heavyweights, specific money managers have jumped into Ulta Beauty, Inc. (NASDAQ:ULTA) headfirst. Candlestick Capital Management, managed by Jack Woodruff, initiated the most valuable position in Ulta Beauty, Inc. (NASDAQ:ULTA). Candlestick Capital Management had $52.9 million invested in the company at the end of the quarter. Karthik Sarma’s SRS Investment Management also initiated a $23.9 million position during the quarter. The following funds were also among the new ULTA investors: Gabriel Plotkin’s Melvin Capital Management, Andrew Kurita’s Kettle Hill Capital Management, and Louis Bacon’s Moore Global Investments.

Let’s now take a look at hedge fund activity in other stocks similar to Ulta Beauty, Inc. (NASDAQ:ULTA). We will take a look at The Liberty SiriusXM Group (NASDAQ:LSXMA), Loews Corporation (NYSE:L), W.P. Carey Inc. (NYSE:WPC), and Ventas, Inc. (NYSE:VTR). This group of stocks’ market values match ULTA’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LSXMA 48 1087620 -2
L 21 107581 -3
WPC 22 33963 1
VTR 25 337381 -4
Average 29 391636 -2

View table here if you experience formatting issues.

As you can see these stocks had an average of 29 hedge funds with bullish positions and the average amount invested in these stocks was $392 million. That figure was $926 million in ULTA’s case. The Liberty SiriusXM Group (NASDAQ:LSXMA) is the most popular stock in this table. On the other hand Loews Corporation (NYSE:L) is the least popular one with only 21 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. 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 12.3% in 2020 through June 30th but beat the market by 15.5 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 15.8% during the same time period 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.

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