ULTA: A growth stock poised for a beauty of a swing trade

Brian Shannon
Brian Shannon

By Brian Shannon, CMT 

Ulta Beauty (ULTA) is a consistently fast-growing beauty company with a stock chart that appears poised for 15-20% upside potential by the end of 2018.

Ulta operates 1,107 stores and plans to open approximately 100 new stores by the end of the 2018. The company sells more than 20,000 different products and represents over 500 brands in its stores and online.

This company has seen overall revenues increase each year since going public in 2007. In 2013, total revenues were $2.67 billion, and that number more than doubled to $5.88 billion by the end of 2017. You have probably seen their stores, but they also have a fast-growing internet presence. In 2013, online sales were $96 million, and for the last full year (2017), the online sales grew to $569 million, close to a 600% increase.

In the chart below, each bar represents one week of trading in shares of ULTA from the beginning of the third quarter of 2014 through July 23, 2018. The yellow highlighted area shows each of the quarterly earnings-per-share reports. The company been profitable every one of those quarters, and the lowest growth of earnings per share in that time was 22%.

Source: MarketSmith

On the weekly chart, we can also see that ULTA is holding above the rising 50-day moving average (DMA) in red on the chart and the rising 200 DMA shown in black. Holding above these two averages indicates that the pullback, which began in the summer of 2017, has transitioned back to an uptrend. For this leg of the uptrend to continue higher, it needs to clear the recent band of resistance between $258 and $261.

Taking a closer look at the chart action on a daily timeframe below, you can see that resistance with more clarity. The recent drop down to 228 found buyers just above the 200 DMA in black. Now the stock is digesting the rally from 228, and it is impressive to see it holding above the 50 DMA. This period of consolidation above the 50 DMA is allowing the stock to build the necessary energy to break through resistance and continue higher.

Source: MarketSmith

The green highlighted box on the daily chart above shows the earnings per share for full years ending 2012 through 2017. This kind of growth is truly impressive.

Also of note is the share repurchase program by ULTA. On March 13, 2018, the company’s board approved a new share repurchase authorization of $625 million worth of stock.

This is how I see the stock setting up for an intermediate term trade. If it can clear resistance and close above 261.50, then it should be able to make a run for the all-time high above 313, made in 2017. The most reasonable place for a stop would be below the low of last week at 248.28. Breaking that low would also put the stock back below the 50 DMA, which would lessen the chance of upside.

If the stock can make it up to the all-time high above 313, then the upside would be 52 points and the risk (based on our stop) would be 13 points. That gives us a 4:1 reward-to-risk ratio. If the stock does break beyond resistance, consider taking partial profits as the stock moves in your favor and to raise your stop below successive higher lows.

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