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Watch These 3 Stock Dips as Consumer Sentiment Hits 7-Month Low

lululemon storefront logo sign

Key Points

  • After U.S. Consumer sentiment reached a 7-month low, some relatively strong consumer names fell to unjustified valuations.
  • With solid financials and fundamentals backing them, a low percentage of 52-week high prices may only last a short time.
  • Wall Street analysts collectively see double-digit upside for these names through their price targets. 
  • 5 stocks we like better than Ulta Beauty

Markets that go through cycles are good since they create opportunities for patient investors who watch for the best deals in the stock market. Today, a shift in the U.S. economy is causing some stocks to come into and out of favor, a most welcomed sign of the rinsing effect that brings on compounding opportunities.

After the U.S. consumer sentiment index had its lowest reading in over 7 months, some companies in the consumer discretionary sector have fallen to unjustifiably low valuations. This is where these patient and watchful investors have a chance to add names like Lululemon Athletica Inc. NASDAQ: LULU, Starbucks Co. NASDAQ: SBUX, and even Ulta Beauty Inc. NASDAQ: ULTA to a potential ‘buy the dip’ watchlist.

These stocks have more in common than just being in the NASDAQ index; they all share an almost obvious brand moat and predictability regarding their future cash flows, but these only come quickly to the savvy investor. As every investment is valued as the present value of all future cash flows, here’s why these businesses could make a quick rebound after disappointing sentiment readings.

Lululemon's 7-Year Low Valuation: A Dip Investors Can't Ignore

Shares of Lululemon are now down to only 59% of their 52-week high prices, sending the company into deep bear market territory. According to Wall Street, a bear market is a 20% or more decline from recent highs. With this in mind, here’s why the stock may not stay down for much longer.

Lululemon Athletica Today

Lululemon Athletica Inc. stock logo
LULULULU 90-day performance
Lululemon Athletica
+0.32 (+0.10%)
(As of 06/18/2024 ET)
52-Week Range
P/E Ratio
Price Target

Its 24.5x price-to-earnings (P/E) ratio is the lowest valuation the stock has seen since 2017, making it a potentially once-in-a-cycle opportunity for those bullish on the brand. As long as Pilates moms, sorority sisters, and finance bros exist, Lululemon is expected to see predictable demand.

And even if U.S. consumers are down and out, Lululemon has strategically expanded into international markets to cushion these domestic cycles. According to the company's latest quarterly earnings report, America's net revenue increased only 3%, while international revenues jumped by 35%.

Knowing that economies of scale and market risk diversification could help the brand reach a higher valuation, analysts at Telsey Advisory Group decided to boost their price targets for Lululemon stock to $470 a share. To prove these analysts right, the stock must rally 53.5% from its current level.

Lululemon Athletica Inc. (LULU) Price Chart for Wednesday, June, 19, 2024

How Starbucks' Financials Reinforce Its Status as Social Currency

There’s a reason nobody walks into a business meeting holding a Dunkin’ Donuts coffee cup or a Dutch Bros Inc. NYSE: BROS branded coffee either. Those who want to feel confident and be seen as ‘cool’ or respectable will walk in carrying their green medusas.

Starbucks Today

Starbucks Co. stock logo
SBUXSBUX 90-day performance
-1.13 (-1.39%)
(As of 06/18/2024 ET)
52-Week Range
Dividend Yield
P/E Ratio
Price Target

When brands become synonymous with objects, investors like Warren Buffett get excited. People don’t say “Internet it”; instead, they refer to “Google it” when trying to find some online information, and the same is true for Starbucks.

People don’t set up a study session or a catch-up meeting at a “coffee shop”; they often say that they will meet at a Starbucks, and that’s the type of social currency that keeps the brand in its pricing power status. Starbucks’ financials show an average gross margin of over 27%, allowing the company to pass enough capital down for intelligent allocation.

This smart allocation nets investors an average of 20% of return on invested capital (ROIC), which is one of the hidden gems in wealth compounding. That is why analysts at Bank of America felt so comfortable placing a $112 valuation on Starbucks stock, or 40.7% higher than today’s stock price.

This should be a welcome sign for the stock’s price action, which has fallen to only 74% of its 52-week high price, giving investors the initial pillar to build a potentially ‘undervalued’ case for Starbucks stock.

Starbucks Co. (SBUX) Price Chart for Wednesday, June, 19, 2024

Ulta's Unique Advantage Lies in Products Not Impacted by Consumer Sentiment or Financial Limitations

That’s right; regardless of whether the economy is booming or busting and whether consumer sentiment is at all-time highs or lows, people will always find room in their budgets for make-up and skincare products. This fact isn’t far from coffee economics, which benefits Starbucks, but that’s beside the point.

Ulta Beauty Today

Ulta Beauty, Inc. stock logo
ULTAULTA 90-day performance
Ulta Beauty
-6.56 (-1.69%)
(As of 06/18/2024 ET)
52-Week Range
P/E Ratio
Price Target

Because Ulta’s revenue comes mostly (95%) from loyalty program members, its revenue streams are as predictable as betting on thousands of consumers brewing coffee every morning. This is why management feels comfortable buying back as many as 588,004 shares off the open market for $285.1 million.

The company’s financials also showcase gross margins at 42.7%, allowing management to deploy capital into further growth initiatives beyond stock buybacks. These initiatives translate into ROIC rates of up to 28%, boosting sentiment amongst Wall Street analysts, even if consumer sentiment remains depressed.

Those at J.P. Morgan Chase & Co. saw it fit to slap a $544 a share price target for Ulta stock, daring it to rally by 39.2% from where it sits today, which also happens to be 68% of the stock’s 52-week high prices.

Ulta Beauty, Inc. (ULTA) Price Chart for Wednesday, June, 19, 2024

Should you invest $1,000 in Ulta Beauty right now?

Before you consider Ulta Beauty, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Ulta Beauty wasn't on the list.

While Ulta Beauty currently has a "Moderate Buy" rating among analysts, top-rated analysts believe these five stocks are better buys.

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Gabriel Osorio-Mazilli
About The Author

Gabriel Osorio-Mazilli

Contributing Author

Value Stocks, Asian Markets, Macro Economics

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Starbucks (SBUX)
4.6848 of 5 stars
Lululemon Athletica (LULU)
4.7336 of 5 stars
$313.23+0.1%N/A25.12Moderate Buy$433.06
Dutch Bros (BROS)
3.1389 of 5 stars
$39.63+0.8%N/A220.18Moderate Buy$39.30
Ulta Beauty (ULTA)
4.873 of 5 stars
$382.59-1.7%N/A14.92Moderate Buy$507.30
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