Buying Ulta Stock Is a Timing Gamble

Consumer sentiment will be a bigger headwind than the coronavirus

Shares of Ulta Beauty (NASDAQ:ULTA) have recovered from the lows they reached in the broad market selloff. Prior to March 18, Ulta stock had dropped nearly 50% in the month of March. So, the 20% recovery is making the stock’s performance look less bad. But with some stocks showing a positive gain for the year, a 20% decline is still a decline.

Buying Ulta Stock Is a Timing Gamble
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To that end, the stock seems to have found some resistance at around $200. The stock is trading well below its 50- and 200-day moving averages. And with a score of 41 on the relative strength index (RSI), the stock could have some room to move up.

But stock charts are agnostic. And in the case of Ulta stock, they don’t take into account the reality that this is not an ordinary selloff. Because this is not an ordinary crisis. The assumption is that the economy will recover quickly once the crisis is over. But the emotional repercussions of the coronavirus may last far longer than any shelter-in-place directive.

The Greatest Fear Is Fear Itself

As Luke Lango points out, Ulta is relatively walled off from the coronavirus. The company’s supply chain is mostly in North America. So, when demand returns, the company is in good position to get quickly up to speed.

But the great unknown is exactly when this crisis will end. And with every passing day, it’s more likely that the question of consumer confidence is not going to be based on hard science, but on emotion, specifically fear.

Every day, reporters provide numbers on the spread of the virus. And the simple reality is that those numbers are likely to continue to rise for several weeks. It may be mid-April or later before there is evidence that the country is successfully flattening the curve.

I could go on a rant about the danger of presenting numbers outside of context. And it’s only logical that the United States would see an explosion of confirmed coronavirus cases when testing is expanded. But for now, the big problem is that the higher that number gets, the more likely it becomes that our current social distancing guidelines will expand on a national level.

That is creating fear in investors. And the real tragedy is that the human cost of the virus is being lost in the legitimate fear of what this crisis will do to the national economy.

Ulta’s E-Commerce Business Can’t Make Up the Difference

E-commerce accounted for approximately 12%-13% of Ulta’s 2019 sales. This will undoubtedly increase as the company has closed all its brick-and-mortar stores. However, the cosmetic sector was already showing a little softness in the fourth quarter of last year. And that was when the U.S. was in the midst of a bull market that showed no sign of stopping.

I’ve known a few Mary Kay consultants in my life, so I don’t have any doubt that the company will make sales during this time. However, many Americans are facing a significant loss of income for an undetermined length of time. So the company clearly will have a hard time forecasting what percentage of sales it will recoup. After all, it seems toilet paper will be more of a premium.

Ulta Stock Is a Hold for Now

I have no doubt that Ulta will bounce back. The cosmetics industry is a defensive stock, and Ulta customers will make allowances in their budgets for the company’s products. And the company’s balance sheet is fundamentally sound. As of their last earnings report, the company was sitting on about $500 million of cash and short-term investments with little to no debt.

The company will be able to weather this storm. But looking at Ulta stock from a technical standpoint, it looks like the rally of this week may be as good as it gets, at least until there is more clarity on when business will get back to normal.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/04/ulta-stock-timing-gamble/.

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