Unexpected move by Buffett: While selling off Apple in the second quarter, he bottomed out on a beauty stock that plummeted this year

Warren Buffett's latest portfolio adjustments have been revealed. As previously disclosed, the largest reduction in holdings was Apple, which was cut in half. Surprisingly, there was a new addition to the portfolio, Ulta Beauty, a cosmetics stock that plummeted this year.

Ulta Beauty has become Buffett's "new favorite." In the second quarter, Berkshire Hathaway acquired 690,000 shares of Ulta Beauty, valued at approximately $266 million. What did Buffett see in Ulta Beauty?

Despite Ulta Beauty's poor performance in 2024 with a 32% decline in stock price, Buffett seems to have identified its potential value.

Firstly, in terms of valuation, analyst Dylan Carden from William Blair believes that Ulta Beauty's stock price has dropped to its lowest point in years. From indicators such as the price-to-earnings ratio (P/E), its valuation is very low, presenting a value investment opportunity that Buffett values.

Ulta's stock price has a P/E ratio in the single digits, similar to luxury department store Nordstrom. While Nordstrom is losing market share and may need to close stores, Ulta still maintains strong capabilities.

From the perspective of free cash flow, companies that are damaged but have competitive advantages often trade at good rates of return, especially with an excellent management team that tends to provide returns to shareholders. Ulta Beauty announced a $2 billion stock repurchase plan in March, with $1.8 billion remaining as of May 4. The company may announce dividend distributions later this year.

Furthermore, Ulta Beauty's unique market positioning, spanning mass cosmetics and high-end brands, may also be one of the reasons Buffett is optimistic about its stock. Analyst Michael Baker from DA Davidson pointed out that Ulta's stock price has been under pressure partly due to a new competitive situation with rival Sephora, which has opened around 1,000 "store within a store" concept stores in Kohl's department stores, putting pressure on Ulta Beauty's market share in the high-end category. This has affected Ulta's market share growth momentum in the high-end category, but the company's share in the "mass" category is still growing.

It is worth mentioning that Buffett's investment strategy typically favors companies with competitive advantages, a good management team, and reasonable valuations, all of which Ulta Beauty meets. Additionally, Ulta has consistently ranked on DA Davidson's "Best Ideas" list, which is based on Buffett's investment philosophy