Warren Buffett just ditched Apple stock and gave his portfolio a complete makeover with this knock-off stock. Is it time to buy?

Warren Buffett’s investment style is not congruent with buying and selling quickly. Rather, the Oracle of Omaha built his fortune at Berkshire Hathaway investing in quality companies and holding their positions of high conviction for decades.

Each quarter, institutional investors are required to disclose their stock positions in a document called Form 13F. Berkshire’s latest 13F has had quite a few changes. Notably, Berkshire sold nearly half of its position in the Apple — a cornerstone of the portfolio for many years. The investment firm later acquired nearly 700,000 shares in a cosmetics company. The ultimate beauty (ULTA 1.17%).

Let’s dig into why Buffett would love Ulta and assess whether your portfolio could also use a redesign with this major beauty retailer.

What is Ulta Beauty?

Ulta is a beauty retailer with nearly 1,400 locations. Its stores can often be found in shopping centers or malls, as well as in “shop-in-shops” at Aim.

One of the things that makes Ulta so unique is its wide selection of products. The company boasts nearly 25,000 different beauty products from 600 different brands. This level of optionality makes Ulta appealing to a broad customer base in various price demographics.

Image source: Getty Images.

Why I think Buffett chose to invest in Ulta

Warren Buffett’s portfolio is heavily invested in financial services functions such as banks or insurance companies.

However, another theme that Berkshire likes is investing in top brands. When it comes to Ulta, the company has a very unique position in the market, which I think helps fuel their ability to build a brand moat. It doesn’t have a ton of competition. Its main competitor is Sephora, a subsidiary of LVMH Moët Hennessy.

To me, owning Ulta stock is much more attractive than buying LVMH because it provides direct exposure to the cosmetics industry. LVMH, on the other hand, is essentially a giant luxury operation that offers only tangential exposure to several different end markets.

Thinking long term

On the surface, investing in a beauty retailer may not seem like the smartest idea right now. The macro economy has been affected by a number of factors over the past two years. In particular, extremely high inflation has dramatically reduced the purchasing power of the average consumer.

These trends have affected retailers across the board. For Ulta, the company’s same-store sales have been declining for some time. Unsurprisingly, investors seem to have made a killing on Ulta stock — sending the stock down 22% so far in 2024. While that may seem alarming on the surface, it’s really only a small piece of the whole puzzle.

Another characteristic of Buffett’s investment style is his acceptance of being a contrarian. While Ulta may look like a falling knife, contrarian investors see an opportunity.

ULTA PE report data by YCharts.

The charts above illustrate some really interesting valuation dynamics. Despite inconsistent sales trends over the past two years, Ulta’s earnings per share (EPS) have grown significantly, suggesting strong economics for the unit as a whole. However, despite these profit levels, Ulta’s price-to-earnings (P/E) ratio has practically dropped off a cliff over the same time frame.

In other words, Ulta was trading at a higher valuation when it was generating lower levels of profit. I think this paradigm appealed to Buffett the most and inspired his position in Ulta. I think Buffett sees Ulta as a value opportunity.

The economy will eventually begin to show more significant signs of improvement over time. When that happens, I suspect opportunities in the commercial space will enjoy new gains. To me, this scenario is exactly what Buffett is predicting for Ulta.

I think investors with a long-term horizon should buy Ulta stock right away. Stocks look very cheap and are poised for a nice rebound once the macroeconomic picture starts to show signs of more general improvement.