We recently published a list Analyst Recommends 10 Best Stocks to Diversify Your Portfolio Away from Mega-Cap Tech and AI Stocks. Since Ulta Beauty Inc (NASDAQ:ULTA) ranks 9th on the list, it deserves a deeper look.
Venu Krishna, Head of U.S. Equity Strategy & Global Equity Linked Strategies at Barclays, recently shared a basket of stocks he recommends offsetting the risks that come from market concentration in big tech stocks. In an interview with CNBC, Krishna emphasized that he remains inclined towards big tech stocks, but the important question he addressed is which stocks offer more value outside of the tech sector in the long term.
Krishna’s methodology to find some of the best stocks outside of the tech sector is simple: find out at what “core fundamental” metrics big tech stocks are “excelling” at and then “try to come close to that and create a portfolio which can give us that kind of exposure.” Through this methodology, Krishna says, he came up with a well-diversified portfolio of stocks that could act as a “hedge” against market concertation in big tech.
Krishna said he applied “liquidity filters” on the whole market to remove a “bunch of companies” and narrow down to stocks with strong growth and FCF multiples.
Despite him pointing out the concentration of gains problem, Venu Krishna believes the rise of big tech stocks is a “healthy trend” and some of the gains are now bifurcating to other sectors, too.
However Krishna said that over the past 18 months his portfolio of stocks has lagged behind the Big Tech, but outperformed equal-weighted S&P 500 and market cap-weighted S&P 500.
For this article, we took a look at Krishna’s latest basket of stocks to offset concentration in big tech risks and picked 10 stocks with the highest number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A photograph of a customer testing out different products in the skincare aisle at a store.
Ulta Beauty Inc (NASDAQ:ULTA)
Number of Hedge Fund Investors: 52
Barclays in a latest report pitched Ulta Beauty Inc (NASDAQ:ULTA) as a stock to diversify your portfolios in a concentrated market. Ulta Beauty Inc (NASDAQ:ULTA) in May posted Q1 results. Adjusted EPS in the quarter came in at $6.47 per share, surpassing estimates by $0.19. Revenue in the period jumped 3.8% year over year to $2.7 billion, missing estimates by $30 million. Comparable sales in the period jumped 1.6%. Ulta Beauty Inc (NASDAQ:ULTA) is operating in the lucrative beauty industry that has secular growth catalysts. Ulta bulls believe Ulta Beauty Inc’s (NASDAQ:ULTA) loyalty program and its products offered for a variety of budget ranges give it an edge over competitors.
During the latest earnings call Ulta Beauty Inc’s (NASDAQ:ULTA) management talked about its loyalty program and memberships growth:
“Our world class loyalty program expanded again this quarter with the retention of our most valuable members remains very strong. We ended the quarter with 43.6 million Ulta Beauty rewards members, 6% higher than last year, primarily driven by member retention. Additionally, we continued to acquire new members and reengage lapsed members. Targeted marketing efforts are elevating more members to our platinum and diamond tiers, and exclusive promotions, point accelerators and personalized contents are driving engagement and retention of these valuable members. Our new store portfolio continues to perform well.
During the quarter, we opened 12 stores, seven more than last year, and their performance exceeded our expectations. Our associate retention has improved across stores, distribution centers and our corporate teams, and we are on track to complete critical elements of our transformational agenda this year, giving us a stronger foundation for future growth.”
Read the full earnings call transcript here.
Ulta Beauty Inc (NASDAQ:ULTA) is expanding in Mexico via its partnership with Grupo Axo. Analysts believe after testing the Mexican market, Ulta Beauty Inc (NASDAQ:ULTA) could mull expansion in different Latin American markets where Grupo Axo already has a strong footprint.
Average analyst price target set by Wall Street for Ulta is $488, which presents a 25% upside potential from the current levels. Given analysts expect Ulta Beauty Inc’s (NASDAQ:ULTA) earnings to grow 9.90% next year, Ulta’s forward P/E ratio of 15 makes the stock attractively valued.
Overall, Ulta Beauty Inc (NASDAQ:ULTA) ranks 9th on Insider Monkey’s list titled Analyst Recommends 10 Best Stocks to Diversify Your Portfolio Away from Mega-Cap Tech and AI Stocks. While we acknowledge the potential of Ulta Beauty Inc (NASDAQ:ULTA), our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than Ulta Beauty Inc (NASDAQ:ULTA) but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.