The stock price of Lululemon Athletica (NASDAQ:LULU) is stretching to new highs. LULU's yoga and fitness apparel and accessories have become incredibly popular. Should investors try to invest in this yoga phenomenon because it is popular?
No. On the contrary, investment returns are ultimately dictated by financial performance, not by the limelight. Independent research allows investors to go beyond the most visible trends and shop lesser-known alternatives. As simple as it sounds, you are better off shopping around than using today's fads as a filter that selects for familiar products or popular stocks.
Regardless of LULU's popularity, its earnings and future cash flows will determine its value. The future financial potential of a stock can be gauged by using financial metrics to determine how cheaply a stock is priced, its ability to weather hardship, and its growth potential.
As alternatives to LULU, consider the following stocks with solid credit scores:
Amtech Systems Inc.
Semiconductor Equipment & Materials
CVR Energy, Inc.
Oil & Gas Refining & Marketing
Drug Manufacturers - Other
SeaChange International Inc.
Lululemon Athletica Inc.
Textile - Apparel Clothing
Like LULU, these alternative stocks are all categorized as "safe" according to the Altman Z-score,* indicating that they are not considered bankruptcy risks.
What's more, these stocks are cheaper, and have better growth prospects than LULU:
EPS growth next 5 years
Based on lower price multiples, these stocks are cheaper than LULU at current market prices. Better yet, they have better growth prospects according to analyst projections. Thus LULU's price would have to drop significantly to be competitive with these stocks because at current valuations they are simply better deals.
Rather than restrict yourself to concentrated investments in a familiar stock, consider a diversified mix of these six securities as a more attractive alternative. You can still go to yoga class even if you think that a concentrated investment in LULU is a stretch.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
*Please read the article disclaimer for this article and Altman z-score calculations.