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Hedge Funds Have Never Been More Bullish On Ulta Beauty, Inc. (ULTA)

Nina Todic

Legendary investors such as Jeffrey Talpins and Seth Klarman earn enormous amounts of money for themselves and their investors by doing in-depth research on small-cap stocks that big brokerage houses don't publish. Small cap stocks -especially when they are screened well- can generate substantial outperformance versus a boring index fund. That's why we analyze the activity of those elite funds in these small-cap stocks. In the following paragraphs, we analyze Ulta Beauty, Inc. (NASDAQ:ULTA) from the perspective of those elite funds.

Is Ulta Beauty, Inc. (NASDAQ:ULTA) worth your attention right now? The best stock pickers are taking an optimistic view. The number of bullish hedge fund positions increased by 1 lately. Our calculations also showed that ULTA isn't among the 30 most popular stocks among hedge funds. ULTA was in 44 hedge funds' portfolios at the end of June. There were 43 hedge funds in our database with ULTA positions at the end of the previous quarter.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

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Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a look at the fresh hedge fund action encompassing Ulta Beauty, Inc. (NASDAQ:ULTA).

What have hedge funds been doing with Ulta Beauty, Inc. (NASDAQ:ULTA)?

At Q2's end, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of 2% from the first quarter of 2019. The graph below displays the number of hedge funds with bullish position in ULTA over the last 16 quarters. With the smart money's capital changing hands, there exists a few noteworthy hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

No of Hedge Funds with ULTA Positions

Among these funds, Two Sigma Advisors held the most valuable stake in Ulta Beauty, Inc. (NASDAQ:ULTA), which was worth $185.6 million at the end of the second quarter. On the second spot was Arrowstreet Capital which amassed $177.6 million worth of shares. Moreover, Renaissance Technologies, Columbus Circle Investors, and Two Creeks Capital Management were also bullish on Ulta Beauty, Inc. (NASDAQ:ULTA), allocating a large percentage of their portfolios to this stock.

As aggregate interest increased, key money managers have been driving this bullishness. Gotham Asset Management, managed by Joel Greenblatt, assembled the most outsized position in Ulta Beauty, Inc. (NASDAQ:ULTA). Gotham Asset Management had $15.9 million invested in the company at the end of the quarter. Michael Kharitonov and Jon David McAuliffe's Voleon Capital also made a $2.1 million investment in the stock during the quarter. The other funds with brand new ULTA positions are Ray Dalio's Bridgewater Associates, Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners, and Richard Chilton's Chilton Investment Company.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Ulta Beauty, Inc. (NASDAQ:ULTA) but similarly valued. These stocks are Liberty Global Plc (NASDAQ:LBTYK), Concho Resources Inc. (NYSE:CXO), Halliburton Company (NYSE:HAL), and Weyerhaeuser Company (NYSE:WY). This group of stocks' market caps are closest to ULTA's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LBTYK,34,3768866,1 CXO,27,552132,1 HAL,33,935104,-5 WY,28,415491,3 Average,30.5,1417898,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.5 hedge funds with bullish positions and the average amount invested in these stocks was $1418 million. That figure was $941 million in ULTA's case. Liberty Global Plc (NASDAQ:LBTYK) is the most popular stock in this table. On the other hand Concho Resources Inc. (NYSE:CXO) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Ulta Beauty, Inc. (NASDAQ:ULTA) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately ULTA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ULTA were disappointed as the stock returned -27.7% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks (see the video below) among hedge funds as many of these stocks already outperformed the market in Q3. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Disclosure: None. This article was originally published at Insider Monkey.

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