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, Small Cap Gems (612 clicks)
Long only, contrarian, special situations, value
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The market has had one heck of a run over the last few months. I have been fortunate enough to have some big winners in my portfolio, including Itron (NASDAQ:ITRI), Warren Resources (NASDAQ:WRES) and recently Aviat Networks (NASDAQ:AVNW). I am starting to balance out my increasingly speculative long plays in mostly underfollowed stocks with selective short positions in a sector that I believe will be increasingly vulnerable to disappointment, the consumer discretionary area.

Consumer spending has been buoyed by a very mild winter that dramatically reduced heating and fuel oil costs for much of the country and decent job growth recently. However, the rise in oil prices could substantially hit gas prices and consumer spending in a negative way over the coming months. I am also concerned that domestic economic activity is not as good as it appears. Here are three consumer discretionary names that I think have very stretched valuations and I am currently short via bear market call spreads:

Ralph Lauren Corporation (NYSE:RL), together with its subsidiaries, engages in the design, marketing, and distribution of lifestyle products. The company offers men's, women's, and children's clothing; and accessories comprising footwear, eyewear, watches, jewelry, hats, and belts, as well as leather goods, including handbags and luggage. (Business Description from Yahoo Finance)

4 reasons RL is vulnerable at $175 a share:

  • The stock has had a parabolic move since its beat consensus estimates at its last earnings report and looks poised for a pullback (see chart):

  • The stock is at the top of its five year valuation range based on P/E, P/S, P/B and P/CF.
  • Despite being upgraded by Argus and the huge rally Thursday, Ralph Lauren ended the day up 1%. Another sign the stock has plateaued.
  • Insiders have sold a third of their shares in the last six months, and analysts' project sales growth will be 60% of the current fiscal year's revenue growth in FY2013.

Lululemon Athletica Inc. (NASDAQ:LULU), together with its subsidiaries engages in the design, manufacture, and distribution of athletic apparel and accessories for women, men, and female youth primarily in Canada, the United States, and Australia. (Business Description from Yahoo Finance)

4 reasons LULU is to be avoided at $65 a share:

  • Insiders have unloaded tens of millions of dollars' worth of shares since the first of the year.
  • The stock is at the top of its five year valuation range based on P/E, P/S, P/B and P/CF.
  • The company is selling at almost 11 times trailing revenues and over 17 times book value.
  • I can't get my head around paying 60 times operating cash flow and over $50mm per existing store for a purveyor of yoga apparel.

Under Armour Inc. (NYSE:UA) develops, markets, and distributes performance apparel, footwear, and accessories for men, women, and youth worldwide. It offers products made from moisture-wicking synthetic fabrics designed to regulate body temperature. (Business Description from Yahoo Finance)

4 reasons Under Armour is no bargain at $85 a share:

  • The stock is at a price level that it has failed to breach several times in the last eight months (see chart):

  • You are paying 46 times trailing earnings for a company that has grown EPS at less than a 15% annual clip over the previous five years.
  • Consensus EPS estimates for FY2012 have actually come down over the last two months, even as stock has staged a 20% rally.
  • Insiders have unloaded tens of millions of dollars' worth of shares over the last few months, and its prime advertising venue (NFL) doesn't start its season for another 7 months.
Source: 3 Well-Loved Retailers I'm Shorting