I last wrote about Lululemon Athletica (NASDAQ:LULU) stock a year ago, when I urged investors to stick with it near all-time highs. After that, it went on to rally another 70% before a correction brought it back down. But within this correction lies another opportunity.
LULU stock is struggling, but it’s a strong soldier in a struggling sector.
I often hear experts say that a small correction — to the tune of 7% — is healthy for the market. If that’s true, then Lululemon must be in tip-top shape. In the blink of an eye it lost 50% of its market capitalization. It is a quality retailer caught in the storm of panic selling. And I believe it will find a bottom soon.
But we first have to acknowledge that our macroeconomic assumptions are in limbo, although market sentiment is more to blame for the volatility. There are no buyers because uncertainty is at record levels. The CBOE Volatility Index (VIX) is at 2008 levels.
Back in 2008, banks were literally going out of business, which is far off from where we are today. But nevertheless, fear is at highs and sentiment is at its lows. That’s why there are way more sellers than buyers in today’s market.
Corrections Are Painful, But They Create New Opportunities
Good news here would open the door to a rally. Lululemon already is a stock that trades on momentum, so such a rally will require investors to have courage. It looks untouchable on the way up, and like a crashing meteor on the way down.
This momentum keeps many investors away, but you can use charts to approach it tactically. Then, you can identify support zones that provide clarity. Just think about how trading machines rely on technicals — on ratios, levels and chart patterns. You can rely on those things, too.
The ongoing correction brings LULU stock into the 0.6 Fibonacci level of the 2017 breakout. This move has already caused carnage, but if you are still long, it’s too late to panic. Furthermore, it is OK for a stock to give up half of its rally.
Such a correction shakes some investors out, transferring ownership to stronger hands, which will help in the next move higher. A correction also gives a stock an opportunity to consolidate around meaningful pivot zones.
LULU stock is back at the baseline of its Christmas 2018 rally. More often than not, these baselines serve as support. But because the VIX is so high, don’t treat these baselines as set support. Rather, look to those baselines as rough areas that are likely to hold.
LULU Stock Still Has Value
Besides, it’s not smart to seek “perfect” entry points. The goal here is simply to catch a falling knife within a logical zone. It makes much more sense to buy LULU stock here than up near its highs.
Eventually, Lululemon’s fans will realize the bargain at hand, but perhaps investors are all waiting for market sentiment to improve. However, if you do your homework now, you will find opportunities that will be profitable in just a few months.
Lululemon products are not cheap — and neither is LULU stock. It sports a price-earnings ratio of 38 and a price-sales ratio of 7.8. There is still a lot of fat on its bones, and it is likely to keep falling along with the markets. That’s why it’s important for investors to start by adding small positions.
We also must mentally contend with the case-by-case reports of the coronavirus from China. The media does a great job shocking readers with headlines, and we are human, so we tend to overreact to shock.
The Bottom Line: The Markets Will Get Through This
Eventually, this too shall pass. I bet that once we get an actual schedule for a coronavirus vaccine, cooler heads will start to prevail. For now, we should expect the unexpected. There are more record lows to come.
If this worsens, the S&P 500 could bottom around 2,040, but bottoming is a process, not a singular moment in time.
Meanwhile, it is important to be cautious and patient. Not that Lululemon needs any other oomph, but its quarterly earnings report is just around the corner, and that story is likely to be grim.
Just remember, Lululemon remains a solid company.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
