China Trade Deal Or No Deal, Ulta Looks Like A Winner

This week, prospects of a China trade deal or no trade deal have increased volatility. Wayne Himelsein, one of my managers who has more than doubled the S&P 500’s return for over 18 years, says it doesn’t matter what he thinks about trade policy. What matters is which companies the market believes will be winners and Ulta looks like a winner.

Ken Kam: This week, people definitely seemed to be more concerned over trade war outcomes and the tactics of our president. How does your investment approach deal with something as vague as “trade policy”?

Wayne Himelsein: The easy way to think about it in the case of tariffs is that however bad tariffs will be for certain products that heavily rely on components imported from China, it will be that much better for those products that don’t. There is always a winner.

Moreover, without having to research which are which, the tells in stock behavior display the characteristics I’m looking for; signs of strength that would not be there if expectations for the future were not improving.

Kam: That exact benefit is what I have grown to appreciate about your methodology. The market is always doing something different, but come rain or shine, you follow through with identifying those winners. On that front, please share!

Himelsein: My new gem for this week is Ulta Beauty (ULTA), but before I get into why I like it, I want to infuse a caveat to what we’re discussing. Yes, I wholeheartedly agree and have had experiences over decades that consistently find winners, but at the same time, it is crucial to understand that the “winning” characteristics that display themselves in stocks are, at the end of the day, only it’s past.

What I mean is that I can seek out the characteristics of strength that have a tendency to achieve future greatness, and might even be correct 55% of the time, which is an edge that subsidizes multi-billion dollar hotels in Las Vegas, so it’s by far “good enough”, but it still means that 45% of the time, I’m wrong. Simply put, a positive edge still includes many wrong calls.

Kam: That’s a beautiful distinction. You are quite right. Even an amazing 90% bet has 10% failure, where 1 in 10 is still pretty high! I see investors get frustrated by losers all the time, not realizing it’s a game of odds. How does this play into your pick?

Himelsein: I agree, even for professionals, it’s tough to always keep in mind that a greater than 50% edge always plays out over time. In fact, before jumping into my next pick, I’d like to expand on this topic for a few more moments in respect of my early April pick of Xilinx that then had an ugly gap down on the 25th.

The reason for the move was disappointing revenues and consequent negative comments from Goldman who then cut their bullish view on semiconductors. The point is that whether a fundamental or behavioral strategist, few could forecast this future disappointment, which is precisely why the stock gapped down on the news. The question is what to do now?

And that’s easy: I just see what the market thinks! My opinion is irrelevant, my experience with finding tells, however, is highly relevant. With Xilinx, I like that it stopped at the gap level and has only drifted sideways, even with the market’s decline this week. It’s just hanging out here as participants try to make a decision. It’s crucial to see where they take it from here before I’m convinced; if it breaks lower, then consensus has spoken, but if it re-establishes its uptrend, however mild, the market is brushing off the event and believes in its future.

The key aspect is that I need to determine the view the market takes so I can maneuver my position. The loss has already occurred, so what matters now is whether the capital invested in that position is best served on betting on its future, i.e. does an edge still exist at this juncture.

Kam: Thank you for that insight on Xilinx, it really helps put things in perspective. I like how you are still in assessment mode, yet every moment focused on the best decision to make for the greatest edge going forward. Can you tell us now about the edge you see in ULTA?

Himelsein: Sure thing. ULTA is a beauty! As many of my readers have come to know, I like long term uptrends; stocks that over the widest expanse of time have consistently climbed to new heights. This is not just because I like the shape, it’s because a consistent uptrend reveals a consistency of good decision making, and consequent growth, within a company. Ironically, such long terms trends could not exist if good fundamentals didn’t support it.

But then it stopped in about mid-2017. Early June of 2017 was the highest high it could reach before it dove, face first in a sharp and unrelenting fall before it settled at a low in late October 2017, a low that it actually came back to visit four months later in late February of 2018. This was, all in all, eight months of a bottoming, but notably, with a nice base established.

Kam: I see that and it looks like it was painful at the time, but then it’s come out of it nicely. Is this why you really like it now?

Himelsein: Generally speaking, yes. But let’s get a little bit more granular with the idea of “came out of it nicely,” as that is, quite honestly, an understatement. After its February 2018 bottom, it made a small run up, to then take a small dip in early July 2018, small because it barely retraced. More so, it found a low, but a much higher one then the big base it had built previously back in Feb. It then re-confirmed this July level after another small dip in mid-August of 2018. It was dipping but on a roll of building a higher base.

From the August dip to November 2018 it took off on an aggressive run-up, looking healthy as ever, but only to stop, hard and fast, at none other than exactly the highest high of mid-2017. The participants knew that level well and could not just forget it. To be fair, it might have reached new heights after that point, but along came the big market correction in December.

Kam: Yes, that December fall took just about everything with it. Even the best stocks can’t seem to hide from heavier tumbles in the broader market. How did ULTA do in the fall?

Himelsein: This is where things got really interesting. December saw the fall alongside the market, but with absolute precision, it made a superb stop at the 230 level, which was none other than the same place of both the lows of July and August 2018. Let’s get this straight, the lowest the market could pull this stock was exactly at the (higher) base it had established earlier that year after already beginning its turn around. With this, its larger turn-around was doubly confirmed.

Then, alongside the rest of the market, it ran up aggressively over early 2019, this time sharp and fast toward its well-known high. In March 2019, it stopped, once again facing the old familiar high of both mid-2017 and November 2018. Here we were again. And then it happened, without even touching the landscape in between, it leaped, airborne into a new zone. Its first taste of untouched sky.

Now, throughout April, ULTA has been hanging out in new territory, ready, after ten months of methodically working its way back, to continue its long-standing uptrend. After proving itself many times over since its trending pause began, it’s now time for ULTA’s beauty to once again shine.

My Take: Just as the best poker players win by reading other player’s “tells,” Wayne evaluates the market’s “tells” to determine when to be aggressive and when to hang back.

Wayne’s Logica Focus Fund (LFF) has an 18+ year track record at Marketocracy. Over that period, Wayne’s model averaged 11.82% a year which compares well to the S&P 500’s 5.87% return for the same period.

If you would like to know when Wayne updates his views, click here.