Warren Buffett's investing style is not congruent with rapid buying and selling. Rather, the Oracle of Omaha built his fortune at Berkshire Hathaway by investing in quality companies and holding on to his high-conviction positions for decades.
Each quarter, institutional investors are required to disclose their stock positions in a filing called a form 13F. Berkshire's most recent 13F did have quite a bit of change. Notably, Berkshire sold nearly half of its position in Apple -- a cornerstone of the portfolio for many years. Subsequently, the investment firm scooped up nearly 700,000 shares in cosmetics company Ulta Beauty (NASDAQ: ULTA).
Let's dig into why Buffett might like Ulta, and assess whether your portfolio could also use a makeover featuring this leading beauty retailer.
What is Ulta Beauty?
Ulta is a beauty retailer with nearly 1,400 locations. Its stores can often be found in shopping centers or strip malls, as well as "shop-in-shops" at Target.
One of the things that makes Ulta so unique is its wide product selection. The company boasts nearly 25,000 different beauty products from 600 different brands. This level of optionality makes Ulta appealing to a broad base of customers across different price demographics.
Why I think Buffett chose to invest in Ulta
Warren Buffett's portfolio is heavily invested in financial services functions such as banks or insurance companies.
However, another theme that Berkshire enjoys is investing in top-notch brands. When it comes to Ulta, the company has an extremely unique market position, which I think helps fuel its ability to build a brand moat. It doesn't have a ton of competition. Its primary competitor is Sephora, a subsidiary of LVMH Moët Hennessy.
To me, owning Ulta stock is far more attractive than buying into LVMH because it provides direct exposure to the cosmetics industry. On the other hand, LVMH is essentially a gigantic luxury operation that only provides tangential exposure to several different end markets.
Thinking about the long run
On the surface, investing in a beauty retailer may not look like the most savvy idea at the moment. The macroeconomy has been plagued by a number of factors over the last couple of years. In particular, stubbornly high inflation has dramatically reduced purchasing power for the average consumer.
These trends have affected retailers across the board. For Ulta, the company's same-store sales have been decelerating for a while now. Unsurprisingly, investors appear to have soured on Ulta stock -- sending shares down 22% so far in 2024.While this can look alarming on the surface, it's really only a small part of the entire puzzle.
Another characteristic of Buffett's investing style is to embrace being a contrarian. While Ulta may look like a falling knife, contrarian investors see an opportunity.
The charts above illustrate a really interesting valuation dynamic. Despite inconsistent sales trends over the last couple of years, Ulta's earnings per share (EPS) has grown significantly -- suggesting strong unit economics overall. Yet despite these profit levels, Ulta's price-to-earnings (P/E) ratio has basically dropped off a cliff over the same time frame.
In other words, Ulta was trading at a higher valuation when it was generating lower levels of profit. It's this paradigm that I think attracted Buffett the most and inspired his position in Ulta. I think Buffett sees Ulta as a bit of a value opportunity.
The economy will eventually begin to show more significant signs of improvement over time. When this occurs, I suspect opportunities in the retail space will enjoy newfound gains. To me, this scenario is exactly what Buffett is forecasting for Ulta.
I think investors with a long-term horizon should buy Ulta stock hand over fist right now. The stock looks dirt cheap and poised for a nice bounce-back once the macroeconomic picture begins to show signs of broader improvement.
Should you invest $1,000 in Ulta Beauty right now?
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Adam Spatacco has positions in Apple. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Target, and Ulta Beauty. The Motley Fool has a disclosure policy.
Warren Buffett Just Dumped Apple Stock and Gave His Portfolio a Total Makeover With This Beaten-Down Stock. Time to Buy? was originally published by The Motley Fool