In response to the spreading COVID-19 epidemic, Ulta Beauty (NASDAQ:ULTA) decided Tuesday to join many other businesses in closing its stores across the U.S. Even without that drastic measure, social distancing was going to hurt Ulta’s business anyway.
Sensing where things were going, the market pushed Ulta stock down very quickly. ULTA was trading above $300 a share in mid-February. Last week, it dipped below $125, down 59% in just a month. And while no-one could’ve predicted the coronavirus, the crash it caused didn’t come out of the blue. Take a look at the chart below, published on our website on September 17th, 2019.
In “Ulta Beauty No Longer a Wall Street Darling” we expressed our concern that the drop from $369 to $225 was just the beginning. The chart above revealed that Ulta’s uptrend since 2009 was a five-wave impulse. The pattern was labeled (1)-(2)-(3)-(4)-(5). The five sub-waves of wave (3) were also visible, while wave (5) was an ending diagonal.
According to the Elliott Wave principle, every impulse is followed by a three-wave correction in the other direction. The sharp drop in September, therefore, was probably just the first phase – wave (a) – of a larger retracement. So, we thought waves (b) up and (c) down should be expected. Six months and one global pandemic later now, here is an updated chart of Ulta Beauty stock:
Wave (a) found a bottom at $222 and made way for wave (b), which led to a recovery to $304.65. Then came the panic and wiped nearly 60% of Ulta’s market value in wave (c). It also completed the 5-3 wave cycle, which has been in progress for 11 years.
Ulta Beauty Can Rebound When Things get Back to Normal
Once a correction is over, the larger trend resumes in the direction of the impulse pattern. If this count is correct, a bullish reversal can soon be expected in Ulta Beauty stock.
Buying shares in a company selling discretionary items when all its stores are closed sounds like crazy. We agree. On the other hand, here are some quotes by two investing legends:
“The time of maximum pessimism is the best time to buy” -Sir John Templeton
“Be fearful when others are greedy and greedy when others are fearful” -Warren Buffett
And while the point of maximum pessimism might not have arrived yet, we don’t believe the current crisis is the end of the world. Ulta’s financial results have been stellar ever since the company went public in 2007. It also has a debt-free, cash-rich balance sheet to help it weather this storm. When things start to improve, the biggest beauty retailer will be there for American women.