00:00 Speaker A
Brian, let’s start on one you like, one you say is a buy. That would be Ulta Beauty. Now this stock has had a great run. It’s it’s up about 70% over the past 12 months. You say, Brian,
00:11 Speaker A
it’s going higher. Let’s go through the reasons why. The first reason you say it’s a buy, attracted differentiated model. Walk me through what you mean by that.
00:19 Brian
So what that means is they have a really diverse line of products. They start at the base kind of mass produced cosmetics and then they work their way up to some of the luxury brands. Having that differentiation on the shelf in one spot for customers allows them to go into the place and decide when and where and how much they want to spend. They’ve done a great job of making those products available to consumers.
00:41 Speaker A
The second reason you say it’s a buy, healthy consumer engagement.
00:46 Brian
This is just all about foot traffic. This means again, the products that they have available at the price points that they’re selling is gaining more foot traffic. When you’re looking at retailers, brick and mortar, this is one of the most key components of growth, so that organic sales growth is showing up because more people are walking through the door.
01:02 Speaker A
The final reason you say, yes, commit capital to Ulta, loyalty platform as a growth engine.
01:07 Brian
They’re really taking care of those customers. That’s what it comes down to is they get more people into the store. They’re rewarding them with this great loyalty program. It makes them show up more and more, capturing more wallet share. Again, that organic growth is the driver of the stock returns. We think there’s a lot more to go for Ulta in the consumer discretionary model.
01:21 Speaker A
All right, you’ve made your case as always, Brian, eloquently. I’m convinced. viewers may wonder, okay, hold on a second, before you pile in. What’s the risk I got to think about? Are you
01:30 Speaker A
at the whim of consumer spending?
01:31 Brian
Yeah, and in the consumer discretionary sector, you’re always at the consumer wallet share, you know, kind of threat if you will. So if there is a capitulation and confidence in the economy, some of these luxury types of buys that consumers make are the first thing to go away. However, we see a pretty durable consumer out there. Retail sales is growing up 3% year-over-year and Ulta’s doing a great job of capturing that.
01:54 Speaker A
Now this stock is up around 70% over the past 12 months, but you must say, hey, you know what, still valuation still attractive?
02:00 Brian
It’s the trajectory of earnings growth. They are continuing to grow profitaly and that’s why we still think there’s room to run even in this stock.
02:06 Speaker A
All right, so you’re buying Ulta. Let’s get to one you will you say, you know what, I would avoid. That would be Arista Networks. You’re not putting money to work in this one. Let’s go through the reasons why, margin erosion.
02:15 Brian
Yeah, this is an actual trade that we just made in our Grow ETF, our large cap growth ETF, where we’re moving out of technology, much like the market is. There’s so much competition out here that is compressing the profitability of their product. Now, Arista has this giant backlog of orders, but they’re having a hard time pushing out enough compute to meet that demand and it’s hurting their pricing margins at this moment in time.
02:39 Speaker A
Second reason, you say this is one you avoid, high customer concentration.
02:43 Brian
Overly reliant on too few customers. They’ve got some really big contracts, it’s a really big backlog of orders, but there’s just too few of the customers that makes us a little bit nervous in terms of concentration.
02:52 Speaker A
A third reason you would avoid, faces stiff competition.
02:55 Brian
Again, that that customer concentration base is under threat because this is an area of technology where there’s so many people doing the same thing that concentration threat is growing. Again, it all comes back to eating away the margin exposure because everybody’s fighting over the same dollars.
03:09 Speaker A
All right. How could you be wrong here? Walk me through it.
03:12 Brian
So if Arista can actually clean up some of their supply chain and get back on track in terms of their margins and profitability, show that they are, demonstrate that they are the best solution in this cloud computing space, they could actually unlock the
03:25 Brian
backlog of about 18 and a half billion dollars in orders.
03:28 Speaker A
All right. Buy Ulta, avoid Arista. Brian, as always, great to see you.
03:32 Brian
Thank you.
03:33 Speaker A
And thank you for all for watching and checking in and for watching, goodbye or goodbye.
