Should I Avoid Ulta Beauty, Inc. (ULTA)?

While the market driven by short-term sentiment influenced by the accommodative interest rate environment in the US, virus news and stimulus spending, many smart money investors are starting to get cautious towards the current bull run since March, 2020 and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Ulta Beauty, Inc. (NASDAQ:ULTA).

Ulta Beauty, Inc. (NASDAQ:ULTA) has experienced a decrease in activity from the world’s largest hedge funds lately. Ulta Beauty, Inc. (NASDAQ:ULTA) was in 40 hedge funds’ portfolios at the end of June. The all time high for this statistic is 46. There were 46 hedge funds in our database with ULTA holdings at the end of March. Our calculations also showed that ULTA isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 79 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.

David E. Shaw of D.E. Shaw

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, we like undervalued, EBITDA-positive growth stocks, so we are checking out stock pitches like this emerging biotech stock. 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. 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 homepage. Keeping this in mind we’re going to view the fresh 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 second quarter, a total of 40 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the previous quarter. By comparison, 38 hedge funds held shares or bullish call options in ULTA a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

The largest stake in Ulta Beauty, Inc. (NASDAQ:ULTA) was held by Select Equity Group, which reported holding $332.3 million worth of stock at the end of June. It was followed by Holocene Advisors with a $154.5 million position. Other investors bullish on the company included Candlestick Capital Management, Citadel Investment Group, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Teewinot Capital Advisers allocated the biggest weight to Ulta Beauty, Inc. (NASDAQ:ULTA), around 4.22% of its 13F portfolio. Running Oak Capital is also relatively very bullish on the stock, setting aside 3.04 percent of its 13F equity portfolio to ULTA.

Judging by the fact that Ulta Beauty, Inc. (NASDAQ:ULTA) has faced falling interest from hedge fund managers, logic holds that there is a sect of funds who sold off their full holdings heading into Q3. It’s worth mentioning that Sahm Adrangi’s Kerrisdale Capital dropped the biggest stake of the 750 funds monitored by Insider Monkey, valued at close to $34.5 million in stock, and James Parsons’s Junto Capital Management was right behind this move, as the fund said goodbye to about $18.9 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 6 funds heading into Q3.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Ulta Beauty, Inc. (NASDAQ:ULTA) but similarly valued. These stocks are HEICO Corporation (NYSE:HEI), Insulet Corporation (NASDAQ:PODD), Cincinnati Financial Corporation (NASDAQ:CINF), Teleflex Incorporated (NYSE:TFX), Broadridge Financial Solutions, Inc. (NYSE:BR), M&T Bank Corporation (NYSE:MTB), and Charles River Laboratories International Inc. (NYSE:CRL). All of these stocks’ market caps are closest to ULTA’s market cap.

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As you can see these stocks had an average of 35.4 hedge funds with bullish positions and the average amount invested in these stocks was $807 million. That figure was $1213 million in ULTA’s case. M&T Bank Corporation (NYSE:MTB) is the most popular stock in this table. On the other hand Cincinnati Financial Corporation (NASDAQ:CINF) is the least popular one with only 22 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 62.6. 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 21.8% in 2021 through October 11th and still beat the market by 4.4 percentage points. Hedge funds were also right about betting on ULTA as the stock returned 10.2% since the end of Q2 (through 10/11) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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