Will Lululemon Go The Green Mountain Way?

| About: Lululemon Athletica (LULU)

Green Mountain Coffee Roasters (GMCR) and Lululemon Athletica Inc. (LULU), are in totally different businesses. Green Mountain is in coffee business, while Lululemon is in athletic apparel. But their stocks do have one thing in common: they are both the darlings of the momentum crowed, investors who are after stocks displaying an uptrend and a theme to support it. The trouble 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 six months-with competition from Starbucks (SBUX) providing the last blow to the Green Mountain's business last week. Would Lululemon have the same fate?

We do think so. Here is why:

Imitation. As is the case with other momentum stocks like Open Table (NASDAQ:OPEN) and Netflix (NASDAQ:NFLX), Lululemon doesn't have a sustainable competitive advantage, as it has no barriers to entry to keep the competition out. Already Gap (NYSE:GPS), Nike (NYSE:NKE), and Nordstrom have developed their own yoga athletic gear, and compete head to head with Lululemon. Nordstrom (NYSE:JWN), for instance, is selling similar gear 30 percent 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 56, Lululemon is an expensive stock compared with its peer Under Armour (UA) and Limited (LTD), which trade at a PE of 46 and 16 respectively.

The bottom line: Economic fundamentals are catching up with Lululemon's stock, which make it ripe for a descent down to earth. That's why I'm building a short position on any upturn.

Disclosure: I am short LULU, NFLX.

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