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Generally speaking, it’s best to trade alongside the experts – and the experts state that beauty care specialist Ulta Beauty (ULTA) is a sell. Frankly, Wall Street analysts provide the traction control that retail investors need, whether they admit it or not. While we have fantasies of driving like Max Verstappen, reality is a very different picture. So, as a rule of thumb, expert opinions should not be ignored.
That’s especially the case when we’re talking about unusual options activity. If the smartest traders in the room believe that ULTA stock is about to tumble into the weeds, you’d have to have compelling evidence to deem otherwise. Still, to make the most money in a trade, it’s usually not achieved through betting alongside everyone else.
Indeed, one of the technical concerns is that ULTA stock is already volatile. Since the start of the year, shares stumbled nearly 19%. If anything, a recovery play could be in order.
Nevertheless, it’s important to respect the consensus view. Right now, the Barchart Technical Opinion indicator rates ULTA stock a 72% Strong Sell. While analysts rate shares a consensus Moderate Buy, not everyone is onboard with the optimistic narrative. Among the 25 experts covering ULTA stock, eight of them peg shares a Hold. A lone voice went so far as to label Ulta a Strong Sell.
Further, while the company posted generally solid results for its first-quarter earnings report, management also revealed that it dropped its guidance for the full year to $11.55 billion from $11.75 billion at the midpoint. That 1.7% decrease should have rattled nerves.
Still, ULTA stock moved higher the day after earnings. It still has some legs to march northward.
Bears May Not Appreciate the Bigger Picture for ULTA Stock
Following the close of the May 31 session, ULTA stock represented one of the highlights in Barchart’s screener for unusual stock options volume. This data interface identifies the market ideas that the smart money may be putting its funds into.
In Ulta’s case, total volume reached 55,349 contracts against an open interest reading of 114,104. Further, Friday’s volume represented a 273.58% increase from the trailing one-month average metric. Drilling down, call volume hit 36,391 contracts versus put volume of 19,003 contract. This pairing yielded a put/call volume ratio of 0.52, which on paper sounds bullish.
However, it’s always a good idea to check in with Barchart’s options flow screener. This interface identifies only the biggest transactions, which means they likely were placed by institutional investors. What’s interesting here is that net trade sentiment sits at $-367,300 in favor of the bears. Notably, the top two most pessimistic transactions featured a premium of $148,500 and $144,000, respectively.
In sharp contrast, the most bullish transaction featured a premium of only $91,400. That’s a stark difference and would ordinarily trigger a cautionary approach. However, investors should consider the broader context.
To be fair, it’s understandable why people would be skeptical about ULTA stock. Tied to the discretionary spending behaviors, consumer sentiment has been declining for several months, boding poorly for Ulta. However, the latest data shows that the consumer confidence index unexpectedly rose to 102 in May, which was stronger than the anticipated print of 96.
Yes, American households generally are still struggling against the backdrop of sticky inflation and elevated borrowing costs. But it’s also fair to say that well-off consumers – those who are likelier to shop at Ulta and take advantage of its services – are experiencing a relative boon.
After all, the indebted struggle during cycles of rising interest rates but savers and those who hold assets are in the opposite camp. Again, the latter category is more in line with UIta’s core consumer group.
Market Projections Bode Well for Ulta Beauty
Finally, it’s important to bring up critical context. Ulta is projected to beat the sales expansion rate of the underlying core market. That being the case, ULTA stock should be considered a contrarian buy, not a consensus sell.
According to Mordor Intelligence, the U.S. beauty and personal care products market size may reach an estimated valuation of $93.74 billion by the end of this year. By 2029, the sector could hit $106.74 billion, representing a compound annual growth rate (CAGR) of 2.63%.
Now, let’s look at Ulta Beauty, which is focused on the U.S. market. Analysts project that between 2024 and 2028, sales may rise from $12 billion to $15.3 billion. That would come out to a CAGR of 6.26%. Even if we were to assume that Ulta started 2024 at $12 billion in sales and marched toward the low-end sales estimate of $14.7 billion, the CAGR would be 5.2% – still above the underlying industry.
That leads me to believe that ULTA stock is being beaten down unnecessarily. It’s time for a rethink.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
