Stock Picks: ULTA and SO

The S&P 500 (SPX) gapped up yesterday, June 4, 2018. It opened 7.05 points higher than Friday’s close. This tells us that market participants are eager to enter the index. A follow through in today’s trading might ignite a rally that takes SPX to 2,800.

As the index continues to affirm a bullish outlook, let’s look at stocks with good profit potentials.

ULTA – ULTA Beauty Incorporated

Ulta Beauty Incorporated (ULTA) is an American holding company that offers cosmetics, makeup brushes and tools, makeup bags and cases, fragrance, skin products, hair care products, and salon services. Formerly known as Ulta Salon, Cosmetics & Fragrance Inc., its first store opened in 1990. To date, they operate in over 48 states through 970 retail stores, and a website that showcases around 20,000 products along with tips, tutorials and social content. Their portfolio of retail product brands include, among others, Ulta Beauty, IT Cosmetics, MAC, Dermatologica, and Urban Decay.

Technical analysis show that ULTA has taken out resistance of 250 in April 2018. This triggered the double bottom continuation pattern on the weekly chart. While the stock pulled back to as low as 234.81 this month, bulls managed to get above the resistance level. The price action serves as a confirmation.

Also, we can see a hidden bullish divergence on the RSI of the weekly chart. This tells us to buy the dips as the uptrend is intact.

In addition, fundamental analysis show that the trailing twelve months (TTM) price to earnings ratio (PE ratio) of ULTA is 26.33.  The stock appears overvalued but it has an average of 35.31 and a five-year maximum of 48.66. This suggests that investors are willing to pay a premium for ULTA shares. Plus, recent earnings report reveal that ULTA beat analyst estimates.

The strategy is to buy as close to 250 as possible. As long as the stock is above this level, bulls have the momentum it needs to climb to our target of 300.

The process may take three months.

Weekly ULTA Chart

Monthly ULTA Chart

As of this writing, the Ulta Beauty Incorporation stock (ULTA) is trading at 256.60.

Summary of Strategy

Buy: As close to 250 as possible.

Target: 300

Stop: Close below 240.

SO – The Southern Company

Southern Company (SO) is an American gas and electric utility holding company founded in 1969. The company currently serves 9 million gas and electric utility customers in nine states through its subsidiaries: Alabama Power Company (Alabama Power), Georgia Power Company (Georgia Power), Gulf Power Company (Gulf Power) and Mississippi Power Company (Mississippi Power).

Technical analysis show that SO appears to be creating an ascending triangle pattern on the weekly and monthly charts. Even though the stock looks bearish due to its sudden drop, we have a couple of reasons to believe that the stock will bounce.

First, bulls respect the 78.6% Fibonacci level. They came to the rescue when the stock fell below the support in May 2018. Also, we can see a hidden bullish divergence on the weekly and monthly charts. This tells us that the uptrend will most likely continue.

Furthermore, fundamental analysis reveal that SO’s trailing twelve months (TTM) PE ratio stands at 40.30. While the stock appears overpriced, it has a five-year maximum of 104.41. Based on these figures, the stock may have some more room to grow.

The strategy is to buy as close to 43 as possible. If bulls preserve the support, they may ignite a rally to our target of 52.

The process may take three months.

Weekly SO Chart

Monthly SO Chart

As of this writing, The Southern Company stock (SO) is trading at 43.93.

Summary of Strategy

Buy: Buy as close to 43 as possible.

Target: 52

Stop: Close below 42.


Featured image courtesy of Shutterstock.

Kiril is a CFA Charterholder and financial professional with 5+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and funds, as he does his own crypto research and is a Product Manager at Mitre Media. He also has his personal website, where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.