Shares of Lululemon Athletica Inc. (NASDAQ: LULU) jumped over 16% Friday following an impressive earnings report. LULU stock closed at an all time high of $122.19 as both EPS and revenues were a solid beat. I do question, however, the ability for lululemon to continue to deliver this torrid pace of growth over the coming quarters. With shares now looking overbought on a technical basis and overvalued on a fundamental basis, I look for LULU stock to pullback over the coming weeks.
Click to Enlarge InvestorPlace contributor Laura Hoy drilled down into the earnings for LULU, noting that earnings of 55 cents blew past expectations of 46 cents while revenues rose nearly 25% to $649.7 million. Important to note, however, that Lululemon now sports a 55 P/E even after the big earnings beat. This is the richest valuation in the past 10 years and is nearly 70% higher than the 5 year average.
The forward P/E of nearly 40 is certainly no bargain either. So while past earnings were undoubtedly impressive, the over reaction of the stock actually expanded the P/E multiple to an extreme. I expect multiples to contract to a more realistic level over the near term, meaning a lower stock price for LULU.
On a technical basis, LULU stock is decidedly overbought. The 14-day RSI is now approaching nearly 90 and is at the highest level in the past year. Shares are now up over 50% in less than 3 months since the stock broke out in late March. The price action from Friday also hinted at a short term top.
Click to Enlarge LULU stock failed to hold on to the intraday highs and reversed course to close well off those levels. This may signal that the buyers have finally become exhausted after such a monster run higher.
Implied volatility (IV) in LULU stock is only at the 20th percentile following the usual post earnings vol crush, so option prices are comparatively cheap to their norm.
Historic volatility, however, is at the 100th percentile, meaning LULU stock is the most volatile it has been over the past year. This favors long volatility strategies when constructing trades. So to, position for a pullback in LULU stock, a straightforward put purchase makes probabilistic sense.
LULU Stock Trade Idea
Buy LULU July $120 puts at $3.50.
Maximum risk on the trade is $350 per contract. The puts have a negative 39 delta, or the equivalent of being shirt 39 shares of LULU stock at trade inception.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.
