Every once-in-awhile a unique opportunity comes along. In the decade preceding the 2020 COVID pandemic, Ulta Beauty Inc. (ULTA)’s stock had demonstrated steady and consistent growth. From February of 2010 to February of 2020, stock prices rose from just $18.33 to $257.09, and had enjoyed a then all time high of $333 in the summer of 2019.
When the COVID pandemic forced the US into a lockdown, Ulta, like many store front businesses, saw a dramatic drop in sales when faced with limited operating hours and in-store services. On March 18 of 2020, Ulta’s stock price fell to $148.06, the lowest in over 5 years. But by May prices had rebounded to $244.01, and just a year after the lockdown began Ulta was trading for $309.17.
As demonstrated by the 5 year history of Ulta’s prices, that blip in March 2020 was an anomaly. When stock prices fall because the company itself is not performing well due to things like bad management or a poor product, prices tend to stay low and the company typically does not demonstrate growth or a rebound in price.
But when a fundamentally sound company is hit by unusual and temporary circumstances it’s called an event. In 2020 Ulta had a DYF score of 89.81, indicating it is a quality, sustainable company. With a fair value estimate of $306.28, during this event it was briefly undervalued by as much as 52%.
In value investing, the first order of business is identifying a wonderful company. Wonderful is assessed based on things like historical growth, durable competitive advantage, management, and debt. Only after a company has been declared a wonderful one should an investor then consider buying it. But often the wonderful companies are over priced. So a value investor will add these companies to a watchlist, then patiently wait for the right time to buy.
For those with Ulta on their watchlist, that low price of $148.06 represented a wonderful value opportunity. While some were panicking amid the uncertainty of the pandemic, others saw this value potential. Today Ulta is selling for $547.78, demonstrating that despite the sudden drop in stock prices, fundamentally the company continued to be strong and robust. Those with the foresight to purchase at $148 would be enjoying 270% in returns today.
Really good companies do experience events, and like leap year they don’t happen very often. But unlike leap year, we don’t know when the next event will happen. It’s a good idea to have a handful of solid companies on your watchlist, then just sit back and monitor stock prices. Two defining pieces of an event is that it is temporary, and not based on a fundamental issue with the company. If stock prices fall, you as the investor need to decide if it appears to be an event or not. And in those cases, once stock prices fall below the fair value estimate, you might just find yourself in one of those rare but wonderful value opportunities.
