Warren Buffett’s Berkshire Hathaway (BRK-B) disclosed a new position in Ulta Beauty (ULTA) yesterday – and the news sent Ulta’s stock up 11% after hitting a multi-year low earlier this week.
The firm purchased 690,000 shares to establish a stake worth about $266 million. That may sound like a large investment. But considering Berkshire finished the second quarter with $277 billion in cash, it’s not that sizeable of a position after all.
The bigger question is why the 93-year-old legendary investor bought into the largest specialized beauty retailer in the U.S. – with nearly 1,400 stores as of the end of 2023 – in the first place.
Well, why not?
Ulta is trading 35% below its 2024 all-time high and has been struggling for more than six months to stop the slide. So I suspect Buffett sees value in the shares at current prices.
Based on valuation metrics, the company is trading with a forward price-to-earnings (P/E) ratio of 13 and a price-to-sales (P/S) ratio of 1.4. Both are attractive for a growth stock. But growth has been slowing at the retailer, and it’s only expected to increase revenue and earnings by about 5% annually over the next two years.
I spend a pretty penny on my daily face lotion and SPF creams, but I wouldn’t count myself as part of the core makeup and skin care market. Still, the industry appears to be robust, and I don’t expect the growing trend – especially among younger people – to slow any time soon.
That said, the lack of big growth in Ulta concerns me.
I recommended Ulta back in November 2009. Shares were trading at a split-adjusted $17.09 per share at the time. They closed yesterday at $365 and climbed as high as $574.76 earlier this year. If you listened to my advice back then and held on, you’d be sitting on quite the return.
But I’m not telling you that to compare myself with one of the greatest investors of all time…
Instead, I want to explain how I discovered the company in the first place. I was running some errands with a friend and she needed to run into an Ulta store to pick up some makeup. I waited in the car. But I got bored. I went inside to see what was taking so long and was blown away at what I saw. It was a one-stop shop for makeup, skincare, haircare, and things I couldn’t begin to name.
Plus, it was packed with people.
As soon as I got home, I dove into research mode and discovered that Ulta was a publicly traded company worth around $1 billion. It was the exact size of the kind of undiscovered business I strive to find for my subscribers.
After doing my due diligence, I recommended it in my newsletter at the time. And as I just showed you, anyone who followed my advice was handsomely rewarded.
This is the kind of boots-on-the-ground research I continue to do to this day. I keep my eyes open in real-life situations and listen to the people around me. That strategy has led me to some of the best investment ideas I’ve ever had. And I have no doubt it will continue to do so in the future.
Another legendary investor Peter Lynch said to “invest in what you know.” I couldn’t agree more.
Here’s to the future,
Matt McCallEditor, Market Insights
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