Page 1100 - How to Make Money in Stocks Trilogy

86 HOW TO MAKE MONEY IN STOCKS—GETTING STARTED

One example is Ulta Beauty. As we saw in the case study for Ulta (see
Chapter 2), it had explosive earnings growth; it had a popular new retail
concept that was revolutionizing how cosmetics were sold; and mutual
funds were heavily buying its stock.
But when it launched its 165% run, Ulta Beauty’s Retail–Specialty indus-
try group was only ranked #82.
The group ranking is important because a higher ranking means funds and
other institutional investors are moving into that industry. So if you do invest
in a stock that is not in a top 40–50 group, make sure the stock gets flying col-
ors for the other checklist items. You also need to make sure mutual funds
are heavily buying the stock to at least partially make up for the lower group
ranking. That was the case for Ulta: In the 4 quarters before its big move, the
number of funds that owned shares jumped from 197 to 315.
Also, if the group ranking is sub-par, make sure there is at least one other
top-rated stock in the group. That confirms institutions are showing some
interest in the industry. You had that for Ulta Beauty: Fellow retailer Sally
Beauty Holdings sported a solid 95 Composite Rating and launched a big
run around the same time as Ulta.

Scenario 2: Drop in Fund Ownership in Most Recent Quarter
but Strong Accumulation/Distribution Rating

Let’s say you were running Lululemon Athletica through this checklist in
September 2010.
Did it have big earnings growth? Yes, its EPS growth in the prior 3 quar-
ters accelerated from 43% to 100% to 180%. It also had a very strong 30%
return on equity.
Did it have a new, innovative product or service? Yes, again. It had found
a profitable niche with high-end yoga apparel as the popularity of yoga was
rising.
Were mutual funds heavily buying the stock? Yes, but with some caveats.
In the first quarter of 2010, the number of funds that owned Lululemon
jumped from 189 to 223. But in Q2, it dropped to 206. As we saw in the “Big
Rock #3” section of the checklist, you’d prefer to see that number rise in the
most recent quarter.
But there were mitigating factors that made up for that flaw. One was that
even with that drop, the number of funds that owned shares was up over the
last 4 quarters, from 195 to 206.