Did The Smart Money Get Ulta Beauty, Inc. (ULTA) Right?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Ulta Beauty, Inc. (NASDAQ:ULTA) and determine whether hedge funds skillfully traded this stock.

Is Ulta Beauty, Inc. (NASDAQ:ULTA) undervalued? Investors who are in the know were taking a bullish view. The number of bullish hedge fund positions moved up by 2 in recent months. Ulta Beauty, Inc. (NASDAQ:ULTA) was in 42 hedge funds’ portfolios at the end of the third quarter of 2021. The all time high for this statistic is 46. Our calculations also showed that ULTA isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings).

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind we’re going to analyze the key hedge fund action encompassing Ulta Beauty, Inc. (NASDAQ:ULTA).

Peter Rathjens of Arrowstreet Capital

Do Hedge Funds Think ULTA Is A Good Stock To Buy Now?

At Q3’s end, a total of 42 of the hedge funds tracked by Insider Monkey were long this stock, a change of 5% from the previous quarter. On the other hand, there were a total of 31 hedge funds with a bullish position in ULTA a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Select Equity Group held the most valuable stake in Ulta Beauty, Inc. (NASDAQ:ULTA), which was worth $234.6 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $231.2 million worth of shares. Citadel Investment Group, Citadel Investment Group, and D E Shaw 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 Teewinot Capital Advisers allocated the biggest weight to Ulta Beauty, Inc. (NASDAQ:ULTA), around 4.23% of its 13F portfolio. Kettle Hill Capital Management is also relatively very bullish on the stock, setting aside 3.95 percent of its 13F equity portfolio to ULTA.

As aggregate interest increased, some big names were leading the bulls’ herd. Laurion Capital Management, managed by Benjamin A. Smith, assembled the biggest position in Ulta Beauty, Inc. (NASDAQ:ULTA). Laurion Capital Management had $16.4 million invested in the company at the end of the quarter. Kamyar Khajavi’s MIK Capital also made a $8.1 million investment in the stock during the quarter. The other funds with brand new ULTA positions are Andrew Dalrymple and Barry McCorkell’s Aubrey Capital Management, Sander Gerber’s Hudson Bay Capital Management, and Raymond J. Harbert’s Harbert Management.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Ulta Beauty, Inc. (NASDAQ:ULTA) but similarly valued. These stocks are Trip.com Group Limited (NASDAQ:TCOM), Insulet Corporation (NASDAQ:PODD), AMC Entertainment Holdings Inc (NYSE:AMC), DraftKings Inc. (NASDAQ:DKNG), FirstEnergy Corp. (NYSE:FE), Broadridge Financial Solutions, Inc. (NYSE:BR), and SK Telecom Co., Ltd. (NYSE:SKM). All of these stocks’ market caps resemble ULTA’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.9 hedge funds with bullish positions and the average amount invested in these stocks was $930 million. That figure was $936 million in ULTA’s case. FirstEnergy Corp. (NYSE:FE) is the most popular stock in this table. On the other hand SK Telecom Co., Ltd. (NYSE:SKM) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Ulta Beauty, Inc. (NASDAQ:ULTA) is more popular among hedge funds. Our overall hedge fund sentiment score for ULTA is 84.4. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 and still managed to beat the market by another 3.6 percentage points. Hedge funds were somewhat right about betting on ULTA as the stock returned 0.8% since the end of September (through January 31st) and outperformed the top 5 hedge fund stocks but not the market. This is a rare phenomenon as top hedge fund stocks usually beat the market over the long-term.

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