Lululemon Athletica inc. Stock Is a Great Company at the Wrong Price

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LULU stock - Lululemon Athletica inc. Stock Is a Great Company at the Wrong Price

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Retailers are starting to report 2017 holiday sales numbers, and they are indeed quite good. But the stock price reaction to the actual numbers has not be consistent among retail stocks. Some stocks are rallying big alongside strong holiday numbers, but others  like Lululemon Athletica inc. (NASDAQ:LULU), are falling after reporting strong holiday numbers and revising guidance upward. It’s time to abandon LULU stock.

The rising tide in retail that was lifting all boats is over. Now, certain retail stocks are priced for perfection. For those stocks, strong holiday numbers have become a “sell the news” event.

Lululemon is one such retail stock that is priced for perfection. In fact, Lululemon is priced beyond perfection.

I wouldn’t be surprised to see Lululemon stock fall big in 2018. Here’s why.

Fundamentals Don’t Look Good

Failure to rally on good news is usually indicative of a maxed out stock. That is exactly what we have with LULU stock.

Lululemon is a great company with lasting power in the athletic retail industry. They have crafted a niche for themselves among trend-oriented gym-goers. Many trend-oriented girls can’t live without Lululemon, while many trend-oriented men are jumping on the trend. None of this is going to change any time soon.

But at the current price, Lululemon stock has a maxed out valuation.

As I’ve pointed out before, this is a 10% growth narrative with marginal gross margin drivers and some opex leverage potential. All together, I view it as a 15% earnings growth story. For what it is worth, the Street is modeling for 14% growth.

But LULU stock is trading at more than a 100% premium to those growth prospects, 32x this year’s earnings.

That doesn’t make any sense. The S&P 500 is trading at 20.8x this year’s earnings for 11.3% growth prospects (about 85% premium).

From this perspective, Lululemon stock offers considerable less bang for your buck than the broader market. There is no reason for this premium discrepancy, considering market growth is roughly equal to Lululemon growth.

A sizable pullback looks fundamentally warranted.

Technicals Look Worse

Beyond valuation, Lululemon stock looks technically overstretched.

LULU stock has had a big run-up recently. But this rally is nothing new. LULU stock has rallied like this before. And each time, the big rally ended in a big sell-off.

From July 2014 to February 2015, Lululemon stock rallied from under $40 to nearly $70, a rally of about 75% in just a few months. When the stock’s relative strength index (RSI) hit over-bought territory (above 70) and the trailing earnings multiple shot above 37.5, Lululemon stock began to crater.

From November 2015 to July 2016, Lululemon rallied from under $50 to nearly $80, a rally of about 60% in just a few months. In July 2016, the stock’s RSI again hit over-bought territory. The trailing earnings multiple also shot above 37.5 for the first time since February 2015. Not surprisingly, Lululemon stock subsequently fell big.

Lululemon stock finds itself in a similar situation today. It is up big over the past several months. The RSI is in over-bought territory. The trailing earnings multiple is above 37.5 for the first time since July 2016.

History is flashing warning signs here, and I think investors should pay attention.

Bottom Line on LULU Stock

We got those really good holiday numbers everyone was expecting.

And because everyone was expecting them, Lululemon stock failed to rally.

This could be the beginning of a slow unwinding of Lululemon stock, which is fundamentally overvalued at current levels. The stock has done this before, and it will do it again. Buyer beware.

As of this writing, Luke Lango was long ADBE. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/lulu-stock-wrong-price/.

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