This Growth Stock Remains in Style

12/08/2011 9:30 am EST


Timothy Lutts

Publisher, Cabot Heritage Corporation

The market has been moving up, but it’s still important to find stocks that are already on a path to growth, says Timothy Lutts of Cabot Wealth Advisory.

The past week has brought a fine rally in the market. You know the purported reasons: Europe, China, unemployment, consumer confidence, blah, blah, blah.

My two cents says the market was ready for it! It had been down long enough. People were discouraged enough. And there were bargains enough.

So it’s time to be less defensive and more aggressive, in particular by seeking out the leaders of this new bull market.

Leaders are favored, rather than laggards (which may look cheap) because history tells us the leaders are most likely to be higher in the months ahead. Inertia tells us that stocks sitting at lows are likely to stay near their lows.

And leaders are favored especially in the early phases of a bull market, because they have far more potential buyers than sellers. Institutions are still climbing on board, building their positions. And the buying of all these new investors pushes these stocks higher.

One of my favorites today is Ulta Salon (ULTA), which has been recommended several times in recent months. Here’s an excerpt from the latest Cabot Top Ten Trader written by Michael Cintolo:

Ulta Salon is aiming to be a national beauty products chain, selling itself on having the widest selection with constantly changing inventory, rather than top-of-the-line products that demand super-premium pricing.

There’s nothing revolutionary there, but investors have had a lot to be excited about in the company’s consistent expansion, which has led to outstanding growth numbers. In the just-announced third quarter (which ended October 31), Ulta saw sales rise 22%, same-store sales rise 9.6%, profit margins rise, and earnings boom.

Just as important for investors, Ulta opened 28 new stores in the quarter, and has already opened another seven this quarter, completing the company’s 16% planned increase in square footage for the year. Better yet, the top brass expects 15% to 20% square footage growth for many years (probably closer to 20% in 2012)…

Given ULTA’s monster run during the past few years (up from $4 to $74!) and its lofty valuation, you would think that shares would have been walloped during the market’s downturn since mid-July. Instead, the stock has some of the best price-volume action we can find, with repeated big-volume rises and just a couple of mild-volume declines during the past few months.

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