Tickers in this Article: ULTA, BRK-A, BX
Ulta Salon's (Nasdaq:ULTA) stock dropped 16% March 15 due to weak first quarter guidance. Since Ulta went public in 2007, it's had several significant declines in its stock price over relatively short time periods. It's a good stock to play on the drops. Long term I'll show you how to make a lot of money from this beauty stock.

A Surge of Interest
StockTwits is the Twitter of the investment world. On March 15, Ulta Salon announced that its first quarter earnings at best would be 63 cents per share, nine cents less than analyst expectations. Never mind that the one-stop shop for beauty products and services managed to deliver $2.68 per share in earnings in fiscal 2012, a 38.4% increase year-over-year. In this kind of market, any uncertainty produces a rush for the exits. The opportunity cost is just too great for some. As a result of the miss, Ulta's message volume at StockTwits increased by over 1000% on March 15. That's a significant uptick.

What's Changed at Ulta?
Ultra plans to continue opening new stores in 2013; about 125 this year compared to 102 in fiscal 2012 and 61 in fiscal 2011. It expects same-store sales growth (stores open 14 months) of 4 to 6% in 2013, on top of 8.8% comps in 2012 and 10.9% in 2011. That seems bad until you remember it gets harder to deliver similar comp growth after two years averaging 9.9%. Ulta has over 10 consecutive years of positive same-store sales growth. The market might view the earnings outlook as negative but it's nothing of the sort.

SEE: How To Evaluate The Quality Of EPS

Share Price Readjustment
All good companies have stock price readjustments. Warren Buffett recently appeared on CNBC commenting that Berkshire Hathaway's (NYSE:BRK-A) stock has lost 50% of its value on four occasions over its 48-year history. The most recent example being between Dec. 11, 2007, and March 5, 2009, when it lost 54%, dropping from a high of $151,650 to a low of $70,050. The difficulty for investors is figuring out when a stock has bottomed. You can try using technical analysis but that requires a great deal of skill.

SEE: Technical Analysis: Introduction

The alternative is to look at Berkshire's monthly stock prices over the 16-month duration. You'll find that its stock closed down by more than 10% on four occasions:

Date Decline
February 2009 -12.2%
October 2008 -11.6%
June 2008 -10.3%
November 2008 -10.0%

So, if you bought one share of Berkshire Hathaway stock at the end of June 2008, which was the earliest of the declines over the 16-month period, you would have an unrealized gain of 27.1% as of March 15, 2013. If you bought later your paper profits rose exponentially.

Now let's apply the same approach to Ulta Salon. Since Ulta went public Oct. 25, 2007, at $18 per share, the largest decline it's experienced was 71.7% between Oct. 31, 2007, when it hit a high of $35.63 just days after its IPO, and a low of $10.08 on March 14, 2008. That's 93 days of trading to lose almost three-quarter's of its gains. Its second biggest decline was 29.8% between July 7, 2011, and Aug. 23, 2011, when it lost $20.52 over 33 days of trading. Finally, the 16% it just lost on March 15 is its third biggest decline in its five-and-a-half years as a public company.

CEO Departure
In February, former CEO Chuck Rubin shocked investors by jumping ship to head up Michaels Stores, which after six years of being owned by Blackstone Group LP (NYSE:BX) and Bain Capital, looks ready to become a public company once again. Rubin's departure along with soft first quarter guidance has made some investors reevaluate their commitment to Ulta's growth plans. The double blow has its stock down 25% year-to-date through March 15. The doom and gloom surrounding its stock provides investors with a great entry point.

SEE: 4 Signs A Private Company Is Going Public

The Bottom Line
While Ulta's stock has had a lot of good times since its IPO in 2007, it's also had its share of scary moments. I'd invest just half the cash now, making several buys over the next year whenever its stock drops by 10% or more in a single month of trading. You're not going to get the absolute bottom but you will get a better average price.

With Ulta planning 1,200 stores and having just 550 open as of the end of its fiscal year, it's got a lot of work ahead of it; work I'm sure the next CEO will surely welcome. In the meantime, this is a company with significant talent. I don't see it missing a beat in the coming months - with or without a permanent CEO.

At the time of writing Will Ashworth did not own any shares in any company mentioned in this article.

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