Warren Buffett just bought this surprising stock. Should I?

Warren Buffett surprised investors with his recent purchase of The ultimate beauty (ULTA 1.17%) stock. A cosmetics stock seems like an unlikely buy for a portfolio full of financial stocks and old standards, but Ulta fits the Buffett model quite well. Let’s see why and if Ulta might be a good choice for you too.

Ulta isn’t really a surprising choice by Buffett

led by Buffett Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) opened a new position in shares of Ulta in the second quarter with a purchase of 690,106 shares. Those shares are worth more than $260 million and represent a 1.4 percent stake in the company, though they make up just 0.1 percent of Berkshire Hathaway’s stock portfolio.

Ulta is a chain of beauty stores, and I say beauty rather than cosmetics because it has a niche model that includes fairly all-inclusive beauty products and services. It stands out from other cosmetics and beauty companies in two important ways, giving it the competitive edge that’s important to Buffett when looking for great deals.

One way Ulta differentiates itself is by offering a wide range of products at different price points. These include mainstream brands, historically sold cheaply in drugstores, luxury labels typically found in high-end department stores, and independent brands, typically sold through direct-to-consumer channels. Even the competitors love it LVMHSephora’s, which features a similar model of many brands under one roof, lacks the breadth of Ulta’s massive stores.

The other way Ulta stands out is through its service. Not only do they offer makeup, skin care and hair care products, but they also offer a wide range of salon-style services. In fact, it makes service a priority through “salon takeovers,” where some of its luxury brands “take over” Ulta salons for a limited time and present the opportunity to try their products through Ulta salon services. This creates an upward cycle of growth as customers who come for services also end up buying products.

Ulta is led by a strong management team that uses its capital wisely, another point Buffett cares about. Return on invested capital is one of the best in retail, at 57.8% in the first fiscal quarter (ended May 4) and ahead of companies such as Home Depot and Costco.

Why is Ulta stock low?

Another thing Buffett cares about is valuation. He steers clear of overvalued growth stocks and tends to buy stocks that are trading below their intrinsic value.

Ulta shares trade at a price-to-earnings (P/E) ratio of less than 15, though it had hit a three-year low of 12.5 before news of Buffett’s purchase lifted it. That’s still below the price Buffett paid for it, so you can still call it a bargain.

But if Ulta has so many positive qualities, why is it down 25% this year? This underperformance is largely due to the economic environment. Growth has slowed and margins are under pressure, and some of its metrics and guidance have come in lower than Wall Street expected, which is often a signal to cut the price. Revenue rose about 3.5 percent in the first quarter, with comparable sales up just 1.6 percent. It lowered full-year guidance for sales, comparable sales, operating margin and earnings per share.

But is it really that bad?

Ulta carries both luxury and mainstream brands, so consumers may be pulling away even if they still shop at Ulta. In this way, its differentiated model protects it in uncertain times. It has an incredible membership and loyalty program, with 95% of sales coming from rewards members. That’s not so different from market favorite Costco, which reported higher traffic but a flat average ticket as shoppers skip or delay expensive purchases.

That’s why Ulta is a bargain and not a value trap. Its high-growth days may be over, but it’s still opening new stores and has reasons for long-term growth among the loyal beauty enthusiasts it targets. It’s an unusual purchase at this price.