Green Mountain Coffee Roasters (GMCR) Chipotle (CMG), and Lululemon Athletica Inc. (LULU), are in totally different businesses. Green Mountain is in the coffee business. Chipotle is in the Mexican food business, while Lululemon is in athletic apparel. But their stocks do have one thing in common: They are the darlings of the momentum crowd, investors who chase after stocks displaying an uptrend and a popular theme to support it.
The problem is that uptrends do not last forever, especially when the theme that supports them fades away and reality settles in. That's what happened to Green Mountain in the last nine months- with competition from Starbucks (SBUX) providing the last blow to Green Mountain's business last week. Would Chipotle and Lululemon have the same fate?
We do think so. Let's begin with Lululemon first:
Imitation. As is the case with other momentum stocks like Open Table (OPEN) and Netflix (NFLX), Lululemon doesn't have a sustainable competitive advantage, as it has no barriers to entry to keep the competition out. Already Gap (GPS), Nike (NKE), and Nordstrom have developed their own yoga athletic gear, and compete head to head with Lululemon. Nordstrom (JWN), for instance, is selling similar gear priced 30% below that of Lulumon, while "Nike and Gap also are following Lululemon's practice of tapping into yoga's spiritual ethos, an effort that makes customers feel that they're part of the community."
The cooling off effect. Lululemon's sales can, in part, be attributed to a craze that eventually fades away, as people get tired of it, or as another craze catches up with them.
Saturation. Not every person on earth is going to fall for the yoga craze and shop for new gear every other week. This means that, even in the absence of any competition, sales will taper-off, as the market approaches saturation.
A weak economy. Money consumers spend on yoga or any other leisure activity is discretionary. This means that a weaker economy will make a dent in yoga gear sales, especially for the high-end of the market where Lululemon caters.
A High valuation. At a PE of 46, Lululemon is an expensive stock compared with peer Limited (LTD), which trades at a PE of 20.
Now let's turn to Chipotle. The company is facing all five threats and the some: Competition from Yum Brand's (YUM) Taco Bell is closing in; hype over Mexican food is tapering off, as evidenced by the company's slow revenue growth in the last two earnings reports; and slow economic growth makes it difficult for the company to raise prices. The company further faces rising labor costs, and even after the recent correction it trades at a PE of 29.
The bottom line: Economic fundamentals are catching up with Chipotle's and Lululemon's stock, which make them ripe for a descent down to earth. That's why I'm building a short position on both stocks in any upturn.