Warren Buffett and Selena Gomez have some interesting overlap in their investments.
Believe it or not, a former Disney star named Selena Gomez shares a certain investment category with Warren Buffett. Since Buffett is not a singer or actor like Gomez, what could the 94-year-old money manager possibly share with a 32-year-old staple of the millennial and Gen Z demographics?
Let’s dive into what industry Gomez and Buffett are both invested in. More importantly, I’ll break down which opportunity in this sector I think looks like a screaming buy right now (and I’m not alone in that view!).
Celebrities, brands, and billions of dollars
Celebrities can be pretty interesting case studies. From afar, their fame makes them seem like some sort of mythical figures that don’t live in the same reality as the average person. But many celebrities actually want to break this barrier and identify real, tangible ways to connect with their fans. One way to do this is by parlaying their talents into business ventures.
The intersection of celebrity influence and marketing from some of the world’s most prestigious brands is a powerful combination — and Gomez has been no exception. Gomez is the founder of cosmetics company Rare Beauty.
While Rare Beauty’s valuation has some conflicting reporting, there are some decent proxies to measure its success. Media outlets suggest that Rare Beauty is generating between $350 million and $400 million in annual revenue. Those sales figures, combined with the company’s 7.6 million followers on Instagram, have me confident that Rare Beauty has been a successful endeavor for Gomez.
While the cosmetics industry may seem largely influenced by celebrities, Buffett recently made a move of his own in the beauty category.
Image source: Getty Images.
Berkshire Hathaway’s interesting makeover
According to Berkshire Hathaway‘s latest 13F filing, the investment firm took a position of roughly a quarter-billion dollars in cosmetics retailer Ulta Beauty (ULTA 1.41%) last quarter.
This might seem like a strange move for Buffett at first glance. However, Buffett is involved with a number of businesses that are tangential to the cosmetics and fashion markets. For example, Berkshire owns jewelry brands Ben Bridge and Borsheims, diamond company Helzberg, and shoe businesses Brooks, H.H. Brown, and Justin Brands. To me, Ulta is just a different version of some of Buffett’s other retail positions.
With its nearly 1,400 brick-and-mortar stores featuring 25,000 products across 600 brands, Ulta is appealing to a broad range of customers among several different age and price demographics. Moreover, the company’s partnership with Target serves as an additional funnel to bolster customer reach and brand equity.
Forget growth, look for value instead
An important metric when assessing the health of a retail business is same-store sales. Same-store sales help determine growth trends among comparable storefronts, ultimately showing retailers the profitability among their locations. Analyzing these unit economics provides a sense of foot traffic patterns among shoppers and can help determine expansion strategies.
Ulta’s comparable sales have been decelerating for a few years now. Rising competition and a tough macroeconomy weakened by lingering inflation are two culprits that have taken a toll on Ulta. But with that said, Ulta’s cash flow growth has demonstrated some resilience over the last several periods despite some lumpiness across the top-line.
ULTA Revenue (Quarterly) data by YCharts.
The chart below benchmarks Ulta’s price-to-earnings (P/E) multiple against a set of direct peers in the beauty industry such as e.l.f. Beauty, Estee Lauderand L’Oreal. The big takeaway here is that Ulta’s P/E is the lowest (by far!) among this cohort of beauty brand stocks.
ULTA PE Ratio data by YCharts
Considering Ulta’s cash flows are strengthening despite a noticeable deceleration across the top line, combined with its ongoing share buybacks, it’s possible that management and Buffett view the stock as undervalued.
To me, the current state of consumer resilience is stronger than what many might perceive and I would not be surprised to see upticks in sales metrics sooner than later. Furthermore, the combination of a strong brand, rising cash flow trends relative to sales, and a dirt cheap valuation make a compelling case for buying Ulta stock hand over fist right now.
