How Did We Know ULTA Was Going to Tank? - Chaikin Analytics

How Did We Know ULTA Was Going to Tank?

In the days leading up to ULTA’s earnings report on August 29th of this year, market participants seemed to have real confidence in the cosmetics retailer. They were bidding up prices in anticipation of a great report that reinforced their belief that ULTA was a great stock. Chaikin Analytics was not in this camp. 

On the 29th after the market closed, ULTA reported. The report was NOT good, and the stock basically fell off the cliff. Not only did the company miss earnings and revenue estimates, it also lowered guidance on the future of the company’s performance metrics. This was a black eye in every regard.

The market was not pleased, and on Friday, trading was fast and furious in the stock. But it opened immediately down, and just continued to plunge as the report was digested by the market player. When the dust settled at the close, the stock had dropped from $337.45 to $237.43 losing almost a third of the company’s value in a single day. So how did Chaikin figure out that this was coming?

Chaikin Analytics is a dispassionate, unbiased rated of stocks. We use a 20 factor model that looks at every facet of a stock to form a view of the company. This view takes the form of a Power Gauge rating. This rating is designed to deliver a viewpoint of where a company is going in the next 1 to 6 months. This rating has been a tested over 20 years, and really holds up over time. Most importantly, it often serves as a gut check against market hype.

In the month leading up to the earnings release, Chaikin Analytics Power Gauge rating was flashing a warning sign – we were very bearish, and had downgraded ULTA in the last week of July. Looking at some of the factors will show the reader how Chaikin “thinks” and how we arrived at this forecast.

Some background on the Power Gauge Rating will help with this explanation. We look at 20 factors that are contained in 4 broad areas.

First is the company financials – e.g. long term debt to equity, and price to sales ratio. These are great indicator of the overall company health. In the case of ULTA – they were flashing red. In particular, Debt, Price to Sales and Price to Book ratios were all indicating that this company had more risk than others.

The next section looks at Earnings. We want Earnings to be growing, stable and predictable. In Ulta’s case, earnings had been growing, but exhibited volatility, and unpredictability. So it was rated as bullish with some issues.

One unusual section of our model is the Technicals piece. Marc Chaikin’s skill as a famed technician plays a role here. Not only did he invent Chaikin Money Flow and Oscillator, but he has continue to push the boundaries of technical analysis. In Ulta’s case at the time of the earnings release, it had poor relative strength, poor money flow (it has now grown), and poor  Price Strength. All of these were warning signs. Relative Strength shows what the market thinks about ULTA while Money Flow tells us what the institutions think about the stock. In this case, neither particularly liked ULTA.

Finally, the last section is the Experts section. What do the people that know the company the best say about ULTA. This was the section that gave it away. First, the Wall Street analyst community had been lowering their estimates, the hedge funds were shorting the stock, and even the company insiders were selling. This was a major red flag.

While no model is perfect, the Chaikin Analytics Power Gauge rating really looks at all of the influences that drive a stock price. By blending these factors together, it was possible to get a superlative read on the company, and realize that there were serious risks to holding this stock. When the earnings report came out, Chaikin Analytics had been talking about ULTA as a short sale for over a month.

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