A good technique for determining if a stock is worth buying is to track what a company's insiders are doing. Do insiders own a lot of stock? Are they buying or selling their shares?

One reason it's interesting to follow insiders is that they have more information on the health of a company than outside investors. They have access to private information that is both more up-to-date and also more detailed. So if insiders are bullish, they might know something that the public doesn't.

A sizable insider buy at Ulta

In September, Ulta Beauty (NASDAQ:ULTA) board member Charles Heilbronn purchased approximately $59 million worth of Ulta stock in the open market. The transaction brought Heilbronn's total ownership of Ulta to 2 million shares that are worth approximately $480 million. This also means Heilbronn owns roughly 3.4% of Ulta's stock.

The transaction was significant for more than just its large size. It is a vote of confidence that Ulta's stock could be undervalued after it recently dropped as much as 35% following an underwhelming Q2 2019 earnings report.

The last time Heilbronn purchased Ulta's shares was in October 2017. That purchase also followed a steep decline in the stock price. From October 2017 to July 2019 Ulta's stock rallied over 70%, proving his instinct to buy last time was a good one.

A woman applies makeup in front of a mirror.

Image source: Getty Images.

Chanel connection

The other reason Heilbronn's purchase is significant is that it was made through Mousseluxe SARL, an entity Heilbronn uses to manage the fortune of the Wertheimer family which controls fashion house Chanel. The connection between Mousseluxe and Chanel is indirect, but it could signal a strengthening partnership between Chanel and Ulta.

In 2018, Ulta and Chanel inked an agreement to bring some of Chanel's high-end cosmetics and fragrances into a limited number of Ulta stores. This is important because in the retail world of beauty products, carrying exclusive brands can drive traffic to stores. Also, due to their higher retail prices, the high-end products provide better margins for the retailer.

Perhaps the acquisition of Ulta shares by the family tied to Chanel is simply opportunistic and coincidental, but to the extent that it signals a strong mutual bond, Ulta could stand to benefit.

A buying opportunity

The insider purchase on its own is already a good signal that Ulta could be an interesting buy. The fact that Ulta's stock price has pulled back by as much as 35% in recent months after a strong multi-year run strengthens the case.

ULTA Chart

ULTA data by YCharts

The stock declined after Ulta's Q2 2019 earnings didn't live up to expectations. During the company's earnings call, management cited slowing growth in the broader market for beauty products and noted that Ulta actually grew faster than the industry. However, some investors are worried that Ulta is facing competitive pressures from online direct-to-consumer beauty brands.

It's tough to know for sure how Ulta will fare in the future, but the company has a solid long-term track record of growth and doing well by its shareholders. The recent pullback may be an entry point for investors who still believe in the company's long-term prospects.