Investing isn’t always rational. It seems logical that you’d want to buy a stock that’s climbing. That implies it’s doing well and that there’s reason to be confident in its future potential. Sometimes, this is the way to go.
But if a stock is already demonstrating high gains, that could indicate it’s reached a peak. Conversely, stocks that are tanking could be the key to investing success with a rebound. It could be a risky strategy unless there are valid reasons to believe it could stage a strong comeback.
When a stock with every reason to outperform is tanking, that’s an opportunity. Ulta Beauty (NASDAQ: ULTA) is a fantastic stock that typically beats the market and has incredible future potential, but it’s down 19% this year. Here are three reasons to buy it hand over fist right now.
1. The differentiated model
Ulta has built itself into a powerhouse cosmetics business by breaking all of the rules. It brings together luxury and mass brands, whereas the traditional setup divided those two segments into completely different markets. Ulta’s management recognized that the core “beauty” enthusiast shops from both of these segments, and that offering them altogether under one roof was an untapped opportunity. It says that 66% of buyers are these enthusiasts, and they account for 83% of total sales.
Another way it stands out is that it offers services. Other brands all operate similar models: Luxury brands are carried in department stores, and mass brands are sold in pharmacies and supermarkets. Many brands have direct-to-consumer physical stores, a recent development in the world of cosmetics, and today most brands also have digital direct-to-consumer channels. None of these setups are conducive to offering services the way Ulta’s large stores are, and services are a key element of its model. People who come in for services, like hair or nail design, are much more likely to also walk out with products. It’s a flywheel effect that leads to greater loyalty and higher sales.
Today, Ulta carries hundreds of brands across demographics, in addition to its own brands, to tap…
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