Beauty in the eye of the trader
03/15/18

Many traders will tell you February’s correction put many stocks on sale—especially tech, which has since rebounded to fresh record highs.

For discount beauty retailer ULTA Beauty (ULTA), last month’s downturn probably felt like just more of the same. As the following daily chart shows, the stock is trading around 34% below its $314.86 record high from last June, and although it pushed to a nearly six-month high in January, it kept dropping in the back half of February when much of the market was rebounding.

ULTA Beauty (ULTA), daily price chart, 6/5/17–3/14/18

Source: OptionsHouse

But the chart also shows ULTA bounced off its March 2 low of $191.70, which was just a little above the October low around $188. (It’s a more significant level than it may appear to be—more in a minute.) And with ULTA’s Q4 earnings scheduled for release today, traders may soon have some clarity on which way the stock is going to tip in the intermediate-term future.

A year ago, while many retail store stocks were imploding, ULTA was a Street darling and still soaring toward its record high, riding a “makeup industry boom” (seven years of Y/Y growth) that was in part attributed to emerging social media trends (think consumers replicating what they see on Instagram and YouTube, etc.)—i.e., the “selfie generation.”1

If one could argue ULTA’s 2016-2017 rally was perhaps overdone, the same could be said of its subsequent correction. Yes, the company has faced declining margins and competition,2 but it’s still an industry leader, and it’s most recent earnings release (November) marked the 16th consecutive quarter that ULTA beat earnings estimates—and on revenue, it beat estimates 15 times and tied once, with revenues expanding from $868 million in Q4 2013 to $1.34 billion in Q3 2017.3

ULTA Beauty (ULTA), 10/22/12–3/14/18. Weekly ULTA price chart.

Source: OptionsHouse

Then there’s the price action. The weekly chart above shows the October-November 2017 and March 2018 lows occurred in the vicinity of a 50% retracement (around $193.70) of the March 2013-June 2017 rally, as well as the December 2015 swing high (around $188.50). That’s a nice little support zone.

A big earnings miss today could certainly lead to a downside breakout that would put a dent in a bullish outlook, but that support level has now been tested three times in the past six months. If it holds, bulls could try to take ULTA on a run to its YTD high around $250.

It’s also interesting to discover that although some analysts have lowered their ULTA price targets in recent months, those objectives are mostly still well above the stock’s current level. The average 12-month target is $265 (with an admittedly wide range of $208.40 to $300), with 56% or analysts rating the stock a “strong buy,” 38% rating it “hold,” and none giving it a “sell” rating.4

There are no guarantees in trading, but sales are sales.

Market Mover Update: “Is tariff talk setting up a breakout play?” discussed the potential for a breakout move in US Steel (X) after its tariff-inspired rally and consolidation. On Tuesday the stock broke out of its three-week trading range in dramatic fashion, closing down nearly 8% and trading another 3.7% lower as of mid-session yesterday. The move dropped the stock below its January high and brought it close to where it was trading (below $39) on February 15—the day before steel and aluminum tariffs were first floated by the US Department of Commerce.

US Steel (X), 8/11/17–3/14/18. Trading range breakout.

OptionsHouse

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1 Quartz. Amid the “retail apocalypse” one type of store is thriving, thanks to selfies. 4/4/17.

2 Zack’s. Will Ulta Beauty's (ULTA) Positive Comps Aid Q4 Earnings? 3/12/18.

3 StreetInsider. Ulta Salon Inc. (ULTA) Earnings. 3/14/18.

4 Nasdaq.com. Ulta Beauty, Inc. Stock Research - Analyst Summary. 3/14/18.