S&P 500   5,137.08
DOW   39,087.38
QQQ   445.61
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In Senegal's capital, Nicaragua is a hot ticket among travel agents as migrants try to reach US
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Critical asset just had biggest fall on record (Ad)
Norway's hospitalized king gets a pacemaker in Malaysia after falling ill during vacation
College athletes will need school approval for NIL deals under bill passed by Utah Legislature
S&P 500   5,137.08
DOW   39,087.38
QQQ   445.61
Lawyers who successfully argued Musk pay package was illegal seek $5.6 billion in Tesla stock
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
Peace, music and memories: As the 1960s fade, historians scramble to capture Woodstock's voices
Sports analytics may be outnumbered when it comes to artificial intelligence
Critical asset just had biggest fall on record (Ad)
In Senegal's capital, Nicaragua is a hot ticket among travel agents as migrants try to reach US
California authorizes expansion of Waymo's driverless car services to LA, SF peninsula
Critical asset just had biggest fall on record (Ad)
Norway's hospitalized king gets a pacemaker in Malaysia after falling ill during vacation
College athletes will need school approval for NIL deals under bill passed by Utah Legislature
S&P 500   5,137.08
DOW   39,087.38
QQQ   445.61
Lawyers who successfully argued Musk pay package was illegal seek $5.6 billion in Tesla stock
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
Peace, music and memories: As the 1960s fade, historians scramble to capture Woodstock's voices
Sports analytics may be outnumbered when it comes to artificial intelligence
Critical asset just had biggest fall on record (Ad)
In Senegal's capital, Nicaragua is a hot ticket among travel agents as migrants try to reach US
California authorizes expansion of Waymo's driverless car services to LA, SF peninsula
Critical asset just had biggest fall on record (Ad)
Norway's hospitalized king gets a pacemaker in Malaysia after falling ill during vacation
College athletes will need school approval for NIL deals under bill passed by Utah Legislature
S&P 500   5,137.08
DOW   39,087.38
QQQ   445.61
Lawyers who successfully argued Musk pay package was illegal seek $5.6 billion in Tesla stock
This is the #1 Stock to Buy for the AI Tidal Wave (Ad)
Peace, music and memories: As the 1960s fade, historians scramble to capture Woodstock's voices
Sports analytics may be outnumbered when it comes to artificial intelligence
Critical asset just had biggest fall on record (Ad)
In Senegal's capital, Nicaragua is a hot ticket among travel agents as migrants try to reach US
California authorizes expansion of Waymo's driverless car services to LA, SF peninsula
Critical asset just had biggest fall on record (Ad)
Norway's hospitalized king gets a pacemaker in Malaysia after falling ill during vacation
College athletes will need school approval for NIL deals under bill passed by Utah Legislature

ULTA stock is setting up to swing for the fences

Ulta stock price

Key Points

  • ULTA stock is likely to prove a champion in the coming months, riding on a new momentum wave coming from the consumer
  • With industry-leading margins and returns on capital, this stock fits into a defensive category to bring you safety and growth simultaneously. 
  • Analysts agree, and markets are pricing this sock just about right or a rally.
  • 5 stocks we like better than Starbucks

The markets have been very optimistic about the consumer discretionary sector and its equity components, and for good reason. You see, the United States GDP pushed a 4.9% expansion in the past quarter, which was above many economists' expectations; however, the main driver behind the expansion is what will matter to you today.

The American consumer has attributed a good chunk of this growth. Wall Street's behavior is a testament to the reality under the economy's hood. By looking at the Consumer Discretionary Select Sector SPDR Fund NYSEARCA: XLY, you will note a massive outperformance of 12.0% year-to-date against the S&P 500.

However, some bears are starting to point out that the effects of rising interest rates and stubborn inflation will eventually catch up to the consumer, hurting retail sales in the process. Because stocks like ULTA Beauty NASDAQ: ULTA operate in a recession-proof consumer niche, they make excellent investments today.

Wealth compounder

Do you want to know the secret behind the undeniable track record behind Warren Buffett's stratospheric wealth rise? Well, it can be boiled down to two things: First, find businesses that generate high returns on capital without leverage; second, buy them at a reasonable price and let them grow.


With ULTA, you get these two requirements checked off the list and a third extremely important factor that will help you give up uncertainty and stress, making this a multi-decade hold the easiest decision you have ever made for your portfolio.

You see, stocks like ULTA are what can be termed 'eight to eighty' businesses, where target audiences range from eight-year-olds all the way to eighty-year-olds. More than that, the beauty products space will keep on selling through economic booms and busts.

Another example of a stock with such a social moat is Starbucks NASDAQ: SBUX, where younger consumers can opt for sweeter drinks and snacks.

At the same time, older audiences can get a classic coffee with a pastry on the side. Moreover, the coffee business - just like beauty products - is not going anywhere soon, and it's doubtful that a recession would slow down its sales either.

So look, these qualities are nice and all, but what about the financials? Isn't that where Buffett starts to generate his ideas? Well, after having established that ULTA holds a moat, it is time to translate it into numbers.

Beginning with ROIC (return on invested capital), a five-year average of roughly 25.0% will place ULTA at the top of its peer list. ROIC is key to building wealth since it speaks to management's ability to manage and invest capital correctly; plus, a stock's annual performance begins to mirror ROIC over the long term.

To pay or not to pay

Understanding that ULTA's financials are solid, with its brand moat showing through an industry-leading 43.0% gross margin and 12.0% net income margin, the question needs to be whether today's price is right for a potential purchase.

You could say that ULTA's closest competitor in the miscellaneous retail space is DICK's Sporting Goods NYSE: DKS. You can add Starbucks to this comparable list on a brand moat - plus recession-proof products.

DICK's analysts are placing a price target of $144.1 a share on the stock, which would imply an 18.7% upside from today's prices in order to meet it. Though decent, the real juice comes from seeing where markets value this business relative to the industry.

With an average forward price-to-earnings ratio of 14.5x, DICK's 9.6x is showing a discount of 33.5% to the industry. While you could argue that a discounted valuation makes this stock more attractive, think about this first.

The forward P/E is set to gauge the value and quality of the next twelve months of earnings in stock, and markets will not want to pay for earnings they deem lower quality or lower growth. You wouldn't mind paying a few extra bucks to ensure you got the best doctor in town would you?

In this sense, ULTA's 15.2x forward P/E is not only 58.2% higher than DICK's but also 5.2% over the industry average. There must be a reasonable explanation for this, and there is.

ULTA analysts expect earnings growth to come in at 7.1% over the next twelve months, which is nearly double DICK's expected 4.4%. Add the product and audience moat to this growth, and you can justify paying a premium price for this stock.

Price targets reflect this view, as a consensus of $529.7 will imply a net upside of 27.8% in ULTA stock. And guess what? If the bears are right and there is a slowdown in consumer strength, ULTA will be at the top of the list of defensive growth stocks to be picked.

→ Critical asset just had biggest fall on record (From Stansberry Research) (Ad)

Should you invest $1,000 in Starbucks right now?

Before you consider Starbucks, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Starbucks wasn't on the list.

While Starbucks currently has a "Hold" rating among analysts, top-rated analysts believe these five stocks are better buys.

View The Five Stocks Here

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Consumer Discretionary Select Sector SPDR Fund (XLY)N/A$185.02+0.3%0.75%N/AHold$0.07
DICK'S Sporting Goods (DKS)
4.3621 of 5 stars
$181.24+1.9%2.21%16.17Hold$144.19
Ulta Beauty (ULTA)
2.9788 of 5 stars
$549.98+0.3%N/A22.31Moderate Buy$532.00
Starbucks (SBUX)
4.8732 of 5 stars
$93.16-1.8%2.45%24.91Hold$111.43
Compare These Stocks  Add These Stocks to My Watchlist 

Gabriel Osorio-Mazilli

About Gabriel Osorio-Mazilli

  • gosoriomazzilli@gmail.com

Contributing Author

Value Stocks, Asian Markets, Macro Economics

Experience

Gabriel Osorio-Mazilli has been a contributing writer for MarketBeat since 2023.

Areas of Expertise

Value investing, long/short trading, options, emerging markets

Education

CFA Level I candidate; Goldman Sachs corporate training; independent courses

Past Experience

Analyst at Goldman Sachs, associate at Citigroup, senior financial analyst in real estate


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