Shares in Lululemon Athletica Inc. (LULU) [TSX: LLL] have soared by over 1,500% since late 2008, easily turning an investment of $5,000 into $75,000. But Richard Croft, founder and head of investment counseling firm R. N. Croft Financial Group Inc., thinks the gains are now to be made betting on a reversal in the upward trend.
Croft believes sentiment has just gotten too euphoric on the rapidly growing, Vancouver-based retailer of yoga and athletic clothing. There was a share price run-up of over 50% since December, much of it buying in anticipation of another blow-out in the next quarterly earnings report. The company recently reported on those quarterly earnings, and delivered on the high expectations. But now there will be a lull in the news flow.
“With fourth-quarter financials out of the way, an argument could be made that the company’s trailing [price-earnings ratio] at 65 and forward [price-earnings ratio] at 47 might be too aggressive, setting the stage for a pullback in share price,” he concludes.
Croft, one of Canada’s foremost experts on stock options, naturally gravitates toward put options as his vehicle for playing a correction in the stock. “For example, buying the LLL May 74 puts at $3.25 look interesting,” he wrote March 26 on the Option Matters blog.
Perhaps so—however, investors beware. The upward trajectory in Lululemon shares on the Toronto Stock Exchange is littered with the tramped reputations of bearish analysts who dared recommend going short or avoiding purchase.