The market had a nice snapback rally Thursday after several days of declines. Given the poor August Durables report, more Iran/Israel saber rattling and a downward revision to Q2 GDP growth to a measly 1.3%; I think fund managers trying to "buy the dip" to catch up to benchmarks drove most of the uptick. Fueling this suspicion was seeing almost all the high beta stocks do very well today. One stock that did not keep up with its high beta peers was Lululemon (NASDAQ:LULU) which is one of the myriad reasons I added it to my short portfolio today.
Possible negatives for LULU:
- Rumors are rampant that famed investor David Einhorn is shorting the stock and LULU will be in his crosshairs at his next presentation scheduled for October 2nd.
- The company's lawsuit against Calvin Klein is uncertain given most litigation in this area turns out to be futile. If lawsuit fails, it could be a green light for more competitors to get into Lululemon specialty niches.
- The stock had a stellar third quarter and window dressing buying by fund managers will end in next two trading sessions.
- Gap (NYSE:GPS) is making solid progress with its answer to Luluemon, Athleta. It should open a dozen Athleta stores this year and the same next year, including this one in Portland. Athleta sells the same quality yoga fitness gear at 30% lower price points. It also gives the double the discounts Lululemon does to yoga instructors. This could be a serious competitor and could hit margins eventually.
"Lululemon athletica designs, manufactures, and distributes athletic apparel for women, men, and female youth." (Business description from Yahoo Finance).
4 Reasons LULU looks like a good short at $74 a share:
- The company is selling at an absurd 9 times revenues. To put this in perspective, highflying Under Armour (NYSE:UA) is selling at just 3.5 sales.
- Insiders continue to heavy sellers of shares and have dumped over 2mm shares on the market over the past six months. There have been no new purchases over that time frame.
- The stock is selling near the top of its five year valuation range based on P/E, P/S, P/CF and P/B.
- This high beta/high P/E (over 50) stock is very vulnerable should the economy continue to deteriorate, any hiccup hits the overall market or if the yoga fad shows any indication of slowing.
Disclosure: I am short LULU, UA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.