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Too far too fast?

February 14th, 2011 · No Comments

We think so, even though the company has a famous ticker symbol..
Lululemon Athletica (LULU) produces women’s fitness wear and it’s stock price has exploded.

Here is what the Bespoke Group had to say on it a good week ago:

Yesterday we noted the breakout in Sirius XM Radio (SIRI). Today, Lululemon (LULU) — another stock that has done extremely well over the past year or so — has broken out to new highs as well. As shown below, LULU, which is a high-end athletic apparel maker mostly for women, had been trading sideways for the past month or so after going on a big run from September through December. The breakout today puts the stock in uncharted territory once again.

Since going public in July 2007 (not a great time to go public in hindsight), Lululemon is up 326%. From its low on March 9th, 2009 (the same day the S&P 500 bottomed), LULU is up 1,606%. Not bad for a yoga pants maker!

These graphs are, well, nothing less than spectacular. A little look at some fundamentals:

  • At $84.31 (Friday’s close) it has a market cap of $6B, a trailing P/E of 63 and a forward P/E of 45 and the stock goes for almost 10x sales [Yahoo]
  • Nice are the zero debt and $225M in cash, the 10.34% held by insiders [Yahoo]
  • There is a significant number of doubters though, 21.6% of the float (47.5M) is short [Yahoo]
  • Even the most optimistic of the 20 analyst following the stock predicts an EPS of $2 for 2012 (average estimates is $1.86), although it does have a nice history of beating those estimates. It did so the last four quarters handsomely, but we expect more of that being reflected in the analyst estimates and we still think growth is not fast enough for these kind of valuation metrics.

Looking at the (self-updating) chart and what we see is a rather overbought situation, one in which selling short-term out of the money calls could be quite profitable.

So we simply can’t help but agree with Michael Shulman, who called it one of eight cult stocks, and had this to say

Lululemon Athletica (LULU): Where I live the Lululemon store is noticeable for the number of youngish men who sit across the street sipping coffee and watching the women enter the store, many of them physically capable of completely thrashing, with one hand, said oglers. A company still growing and still spitting out profits, it is not growing fast enough, or evenly enough, to justify a P/E of 50. I believe familiarity, not numbers, is keeping the stock up — female analysts that work out and male analysts with spouses and friends who work out are very familiar with LULU. That being said, how many tangerine workout leotards does the average female jock really need? The upside for this $75 stock, which was $26 a year ago, is maybe $90 – the downside $30-$35.

Tags: Technical Trading Ideas