Ulta Salon's Stellar Run Will End SoonULTA) for over a year now. I penned down my first bullish piece back in July 2015 and the stock has returned over 70% profits since then. While I still think Ulta Salon is a great company, I think it is now time for investors to sell the stock.
I think Ulta Salon’s run up may have gone too far and it is time for investors to sell the stock and book profits. Ulta Salon has posted about 20% growth annually for the past two years, which was great considering the stock’s valuation back then.
Ulta Salon is expected to post its quarterly earnings this month. As per Yahoo! Finance, analysts are expecting Ulta Salon to report revenue growth of 20% on a year over year basis to $1.06 billion. On the earnings front, Ulta Salon’s EPS is expected to jump from $1.15 last year to $1.39 this year.
The strong earnings growth will bring Ulta Salon’s P/E down by a bit, but the stock will still be overvalued. Granted the company’s 20%+ revenue growth streak has been commendable, however at a P/E of nearly 50, it should be reporting at least 35% sales growth.
Hence, I think investors should sell the stock and book profits as upside at these levels is pretty limited.
The risk/reward ratio is not favorable for long-term investors at this point in time. Although the stock may move higher on the back of another earnings beat, but I still expect Ulta Salon to move lower or stay flat until it grows into its current valuation.
Image by kaleido-dp / Pixabay
That being said, Ulta Salon’s valuation is not at a historic high. The 5-year P/E high of Ulta Salon is almost 53, which signifies the fact that the stock has always been expensive. Ulta Salon also has a tendency to continue moving higher despite its valuation.
However, I think its run may soon be coming to an end. Moreover, its 5-year valuation high is just 5% higher than its current valuation, indicating there isn’t any significant margin of safety at this point in time. Thus, I think Ulta Salon is a sell at current levels. Investors looking to buy into the stock should wait for a significant pullback to enter the stock.
Disclosure: No Position
Published on Aug 18, 2016By Ayush Singh