Ulta Beauty: Good Investing Is Not Easy

How many times have you heard, If I'd just bought 1000 shares of Apple , Alphabet or Microsoft -- and never sold it -- I'd be a multi-millionaire today? After a fine fiscal fourth-quarter report on Mar. 15, 2019, you might choose to add Ulta Beauty to that list. Over exactly one decade, 1000 ULTA surged from $5,620 in value to $338,410. Imagine what those 1000 shares could be worth in another 10 or 20 years. ULTA is fiscally strong and rates in the top 1% in terms of earnings predictability compared with all 1700 companies covered in Value Line's main research universe. Its share price, however, has been anything but stable. Volatility is the fly in the ointment that keeps most people from actually carrying out that plan of holding forever. Early investors in ULTA saw it plunge by 88.5% over around 17 months from October of 2007 through March of 2009. Four times since, ULTA declined by 30% to 40% over short periods of time. Last December's selloff saw a 30.4% slide over just a sickening 35 days. Lower prices should make true believers salivate for more. In reality, though, most people sell into them to protect previous gains against even more severe damage. From 2009 through 2019 ULTA carried and average P/E of 28.7x. Its 10 best buying opportunities during that decade (green-starred below) all reflected significant discounts to that normalized multiple. The stock's four should have sold moments for traders (red-starred) all reflected above-average valuations. Selling then would have avoided the sharp percentage pullbacks detailed in the table above, allowing traders to buy back their ULTA for substantially less than they sold it for. It also would have sidestepped those sometimes-long periods of time when this non-dividend-paying stock went down, or sideways for almost two years. Nothing makes people unhappier than sitting on dead money that was clearly overvalued and begging to be unloaded, if only they'd recognized it. Good news, like ULTA's recent earnings report and forward guidance, attracts momentum investors. It also triggers analyst upgrades. Both factors suck new money into buying when valuation is no longer attractive. Why commit new dollars to ULTA now, following a 12-month move from $199 to $338? Assume a slightly below-average, 28x forward multiple on management's $12.75 projection for FY 2019's EPS due to the Law of Large Numbers. The larger the base, the harder it becomes to post fast-growing profits. That suggests an unexciting 12-month target price of around $357, just 5.5% above ULTA's current quote. Independent research firm Morningstar is quantitatively based. They are more conservative than I am regarding ULTA's year-ahead share price prospect. Morningstar calls ULTA, at $338.41, a 2-star, sell. They note its present day fair value estimate as just $305.86, leaving little room for upside even if FY 2019 plays out well. Long-term holders in this fine company are likely to see gains over the next three, five or 10 years. That said, there will almost certainly be a much-better time to get involved, based on ULTA's previous trading history. Good decision making requires avoiding group-think and buying when others are selling in despair, not chasing good news at all-time highs. Here is my analysis, published last August on Real Money Pro, back when ULTA fetched just $241.74. My very conservative target price at that time has already been far exceeded.

Ulta Beauty: Good Investing Is Not Easy

This stock has been a beautiful performer, but right now it is overvalued.

Columnist Conversation

Another Great Week for Adient (ADNT)

IPO Euphoria is Here...But for How Long?

ADDED Some Lockheed Martin

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.