Signals Matter Short Trade Example: ULTA Beauty, Inc. -- Beauty or Beast?

Signals Matter Short Trade Example: ULTA Beauty, Inc. — Beauty or Beast?

Furious woman
ULTA Beauty

Below we offer a brief example of a Signals Matter short trade in ULTA Beauty, Inc (ULTA).

This Woman Appears to be Upset

Here’s a hypothetical, a little storytelling provided to exemplify how good trades can go wrong.

We’re thinking the woman in the photo (let’s call her Dona) may have been a long only investor ULTA Beauty, Inc. (ULTA).

Dona would have invested for good reason. This stock has been on a tear since 2014 … until late last July that is.

SignalsMatter short trade example ULTA

No One Told Dona

You see, no one told Dona that overbought stocks can fall off a cliff. She may have invested on her own, a happy consumer of ULTA products. Or this could have been a broker pick.

No matter. Like many investors, Dona wasn’t keen on opening every monthly brokerage statement that came in the mail. Life was good. ULTA products were helping. She was making good money.

Until she opened her July statement to see this stock down almost 40% – an outcome that could have been avoided had she subscribed to SignalsMatter.com.

The Real Story

Enough storytelling. Here’s the real story

Defining ULTA: NASDAQ (Beauty & Cosmetics, Retail)

ULTA Beauty Inc operates a chain of beauty stores that offer consumers throughout the United States a broad range of cosmetics, fragrances, skin and hair products as well as salon services.

ULTA was a real beauty.

ULTA FY revenues had grown steadily, from $2.2b in 2013 to 4.9b in 2017 ($5.9b estimated for 2018). Earnings per share were strong, ranging from $2.68/share in 2013 to $6.52/share in 2017 ($8.37 estimated for 2018).

But this beauty turned ugly in early June 2017, as pressures brought forth by Amazon took their toll. Shares of ULTA have fallen almost 40% since hitting a 52-week high of $314 in June. ULTA is now a blemished beauty according to Barron’s.

Today, the stock is 24 percent below Bloomberg’s consensus one-year target price. ULTA has returned a negative 20 percent so far for 2017 and a loss of 20% in the past 52 weeks.

This Set Up was a Beauty

ULTA’s steady and strong revenue and earnings growth over a long period of years suggested the company was doing everything right, until two things happened: 1) The stock became overbought, and 2) the mighty Amazon.com forced a structural change in how cosmetics are bought and sold, and at what price.

We’ve written about Amazon elsewhere. It’s an equally fascinating story, but whether you love or hate (or ignore) Amazon’s balance sheet, there’s no denying that this online juggernaut has entirely changed the retail sector in general and enterprises like ULTA in particular…

On March 24, 2017, our Signals screamed overbought for ULTA, putting us on notice that a fall from its lofty perch could be imminent. Often the fall can take months, but It didn’t take long this time around.

We Shorted the Stock on June 23

Signals Matter posted a SELL Signals on June 23 and as we often say, this rest is history.

We just let this stock slide until August 8, when volatility in the stock reversed to the upside, enabling a tidy 25% profit over 77 days, as shown in the daily candlestick chart below.

Signals Matter ULTA

Lessons Learned

Dona learned a few very simple lessons from this experience. Life is not always up! Life is up and down. Here at Signal’s Matter, we are agnostic to direction. You should be too.

Think beyond ULTA. We are in a highly-bid (i.e. “irrationally exuberant”) stock market. It, along with the many securities which comprise it, can and will reverse.

Dona needed some help. Her broker could not have seen this coming because brokers don’t have the time or analytics to watch every stock for every client, let alone in many instances, the broader stock market as a whole.

In these crazy markets, it’s absolutely essential to be an active rather than passive investor. We talk about this in our Investment Primer and video-blogs (which will be going public in mid-November).

The days of passively riding a market wave have passed. It’s critical that investors—like Dona—avoid wipeouts…

That’s what we do here at Signals Matter. We watch your back, we monitor your trades and we tell you when to enter and when to exit. If we are right, we let our profits run. If we are wrong, we cut our losses short.

Good traders know this: it’s not about calling a direction (i.e. up or down)—it’s about managing the trade.

That’s How Money is Made

And that’s how money is made … by being on the right side of the market most of the time, and then knowing how to let our victories run while cutting our losses quickly, unemotionally. That’s what we do. That’s how we can help.

What’s Signals Watch? Never Heard of Us?

No worries. Signals Watch is a weekly publication of Signals Matter that showcases individual stocks and exchange traded funds that meet our rigorous technical and fundamental criteria for investment.

Why is Signals Matter important to you?

Because our Signals Take the Stress Out of Investing

Smart investing is about living, not trading; about knowledge, not fear. That’s why we do the heavy lifting here at Signals Matter, why we signal the trade and why we manage the risk. All you do is pull the trigger, if you or your advisor are so inclined.

We built Signals Matter because we know that almost no one outside of a professional investment platform has the time, interest or resources to select, combine and derive sophisticated trade Signals as we do from our wide, essential spectrum of technical and fundamental filters.

Simply Condensed

Yet we know as well that anyone, including you, can deploy these tools if properly and simply condensed to an unpretentious and user-friendly dashboard of Signals.

Join Us

To subscribe to Signals Watch (or to our Trend Watch and Recession Watch deliverables which keep an eye out for macro icebergs and opportunities ahead), visit our public Website which will go live in mid-November.

Thereafter, you can join our private community of investors eager to let their profits run, cut their losses short and generally navigate the choppy waters that lay ahead.

In the Meantime

Be sure to visit our interim Blog site at www.SignalsMatter.com for candid talk about where we are, how we got here, where we are likely going … and why.

SIGNALS MATTER, LLC IS NOT A PROFESSIONAL OR LICENSED FINANCIAL OR TRADING ADVISOR. NO INFORMATION OR OPINION HEREIN CONSTITUTES A SOLICITATION OF THE PURCHASE OR SALE OF ANY SECURITY. AS ALWAYS, PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

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