Is ULTA A Good Stock To Buy According To Hedge Funds?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Ulta Beauty, Inc. (NASDAQ:ULTA).

Is ULTA a good stock to buy? Ulta Beauty, Inc. (NASDAQ:ULTA) was in 31 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistic is 46. ULTA investors should pay attention to a decrease in support from the world’s most elite money managers recently. There were 38 hedge funds in our database with ULTA holdings at the end of June. Our calculations also showed that ULTA isn’t among the 30 most popular stocks among hedge funds (click for Q3 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 66 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.

Ken Griffin of Citadel Investment Group

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy 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. With all of this in mind we’re going to take a gander at the new hedge fund action encompassing Ulta Beauty, Inc. (NASDAQ:ULTA).

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

At the end of the third quarter, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -18% from the second quarter of 2020. Below, you can check out the change in hedge fund sentiment towards ULTA over the last 21 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

More specifically, Select Equity Group was the largest shareholder of Ulta Beauty, Inc. (NASDAQ:ULTA), with a stake worth $590.2 million reported as of the end of September. Trailing Select Equity Group was Holocene Advisors, which amassed a stake valued at $107.5 million. Citadel Investment Group, 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 Two Creeks Capital Management allocated the biggest weight to Ulta Beauty, Inc. (NASDAQ:ULTA), around 5% of its 13F portfolio. Kettle Hill Capital Management is also relatively very bullish on the stock, dishing out 4.29 percent of its 13F equity portfolio to ULTA.

Seeing as Ulta Beauty, Inc. (NASDAQ:ULTA) has experienced falling interest from the aggregate hedge fund industry, logic holds that there is a sect of hedgies that decided to sell off their positions entirely last quarter. At the top of the heap, Renaissance Technologies dropped the biggest investment of all the hedgies watched by Insider Monkey, totaling an estimated $28.8 million in stock, and Gavin Baker’s Atreides Management was right behind this move, as the fund cut about $21.3 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 7 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Ulta Beauty, Inc. (NASDAQ:ULTA) but similarly valued. These stocks are United Rentals, Inc. (NYSE:URI), Hess Corporation (NYSE:HES), Monolithic Power Systems, Inc. (NASDAQ:MPWR), Cloudflare, Inc. (NYSE:NET), Cincinnati Financial Corporation (NASDAQ:CINF), KB Financial Group, Inc. (NYSE:KB), and Boston Properties, Inc. (NYSE:BXP). 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 29.6 hedge funds with bullish positions and the average amount invested in these stocks was $524 million. That figure was $1058 million in ULTA’s case. Cloudflare, Inc. (NYSE:NET) is the most popular stock in this table. On the other hand KB Financial Group, Inc. (NYSE:KB) is the least popular one with only 6 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 51.1. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 33.3% in 2020 through December 18th and still beat the market by 16.4 percentage points. Hedge funds were also right about betting on ULTA as the stock returned 19.8% since the end of Q3 (through 12/18) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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