Of course, that’s presuming the forecasts don’t turn even further south. There is a serious risk to high-end retailers if the global economic slowdown persists. In fact, Keybanc Capital Markets recently downgraded LULU out of fears that consumers will be going on the defensive and discretionary purchases like yoga pants will take a hit.
“We do have some concerns that the U.S. luxury consumer may be slowing,” Keybanc wrote to clients on May 24 regarding Lululemon, which is now rated a hold at the investment firm. “While we understand that the demand dynamics between high-end jewelry and activewear are not the same, we do believe that global economic issues do have a more profound impact on the affluent U.S. consumer.”
Know these risks, and protect yourself if you’re bargain hunting.
… But Maybe There Are No “Bargains” Anywhere Yet
The trouble with LULU — and, bluntly, the entire market right now — is that even a successful growth story is overshadowed by fears of a downturn.
Yes, we can get lost in the specifics of Lululemon earnings and perhaps even talk ourselves into why the growth story will persist. But at the end of the day, that doesn’t matter. All the market cares about right now is the fact that Europe’s debt crisis remains shrouded in uncertainty, China is showing signs of slower growth and the specter of a “double-dip” recession in America is looming large after a rather lousy jobs report last week.
Treasury yields briefly hit an all-time low because investors are just plain scared of stocks, no matter what the fundamentals are. Traders are going to cash and checking out for the summer.
And who can blame them?
The story here is partially that LULU is a momentum stock, and these high-growth investments can turn in a hurry once the promise of future gains becomes less impressive. But bigger picture, this is a story of how investors don’t trust the market, and don’t want to stick their necks out and take on any more risk than they have to.
Lululemon might not be slowing down and could very well be oversold today as panicky investors run for the exit. But does that mean it’s a bargain? Maybe not. Because even if LULU can get its swagger back in a few weeks and prove its growth story is still real, it’s a very tall order to convince folks to overlook the bigger market risks that are looming large right now.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the stocks named here.