BY MARK SEBASTIAN
January 11, 2024
Each week, my team will give an overview of a stock. I’ll discuss fundamentals, Licia will analyze the charts, and AG will break down the volatility.
Have a stock YOU want us to review? Email my team here. – Mark
Hey Trader,
This week’s stock is a retailer that has had quite a run higher. All our Option Pit traders are here to break it down. It’s probably the premium name in Yoga Pants. That’s right – we are looking at
Lululemon Athletica (Ticker LULU).
Personally, I am not anti yoga pants. One of my favorite pairs of pants I own is actually from Lululemon (bought for me by my wife bigblondehair of course).
But the stock has had a ridiculous run over the last few months:
Year over year the stock went from below 300 to a high of over 510 dollars a share…at one point it was more valuable than Target Corp!….but that doesnt mean the run isnt justified.
On a positive note, the company makes a lot of money. It had an EPS of 7.86 over the last 12 months, that is really nice earnings. It produces revenue of over 70 dollars a share at 72.12 per share. LULU has positive cash flows over 10 dollars a share and is sitting on cash of over 8.50 a share.
Those are all great numbers.
Even better, the company is carrying a relatively low debt load of only about 2.5 billion dollars in long term debt. This produces a debt to equity ratio of about .71, in line with where it has been over much of the company’s history.
To me that means LULU is not trying to grow too fast…usually the death knell of a retailer.
For me, the question is this: How much sales growth can this company have to justify its huge PE of 61.8
ANF another speciality retailer has a PE of 23.96. To get inline with that number LULU would need its earnings to almost triple.
I do not see that happening…We have seen the stock drop more than 5% over the last few weeks. Frankly, I think there is more downside…
Not because the company isnt executing…they are…but expectations may have gotten a little too hot.
I would not buy…and might look to short.
We’ve been criticized for wearing our yoga pants everywhere, but Lululemon Athletica (Ticker: LULU) does make great yoga pants that don’t look like yoga pants.
I own several pairs and they have lasted a long time, good quality.
More importantly, they make your butt look great. Isn’t that what matters most?
They have a nice clothing line and my twenty year old son and his friends love the sweats, shorts and pants.
Check out the men’s ABC pants, great fabric, washes nicely, doesn’t wrinkle, looks great and looks like normal pants with more comfort.
As much as I love LULU products, the stock doesn’t look as good:
LULU stock has followed my pitchfork rather well.
Pitchfork analysis doesn’t have a whole lot of rules, but one guideline is if the stock doesn’t completely trade to the top or bottom rung, it is most likely going to trade to the opposite top or bottom rung.
In this case, LULU didn’t quite make it to the upper most rung and has rolled over trading lower off a shooting star candle when it traded its high of $511 on December 29, 2023.
Remember a shooting star candle is found at the top of an uptrend and may signal a change in that trend.
Watch for LULU to trade down to $465, $437 and then $405.
Last tip, they do have good sales so you don’t always have to pay full price.
LULU implied vols are as low as their yoga pants
My first experience with Lululemon Athletica (Ticker: LULU) was as a single guy walking down Union Street in San Francisco about 30 years ago past the Lululemon store. My first thought was damn those are some tight yoga pants on the ladies walking the new togs out of the store. My second thought was what is this Bikram Yoga thing. I digress but ultimately I did use Bikram to cure a rupture disk in my back without surgery. Not something I can find in the hinterlands of Maine now sadly. Not many yoga pants either.
The low cut, near see through Lulu yoga pants were probably never meant to be worn outside of a yoga studio but that ship has long sailed to anyone walking down Union Street in San Francisco can attest. Yoga pants have long outpaced yoga studio openings in the USA and are now ubiquitous workout clothes which lead to huge growth.
Note the implied volatility (IV) chart below. 30 day IV is very low post-earnings after a run to $500. Like many stocks lately, LULU has pulled back from near term highs.
LULU chart with 1 day candles on top, 30 day IV on the bottom
The low IV makes me want to buy calendars or calls for an upside play or put calendars or puts for a downside play.
LULU has had too big of a move for credit spreads or iron condors and the IV is too low for those strategies. I would look at puts with an aggressive stop or an upside call as a hedge to stop out the position. Generally LULU has longer moves, until the momentum stops and goes the other way.
Mark, Licia and I will take a peak at this on Tuesday in a special show after the MLK holiday.
The Option Pit Team…
P.S. To see the live show every Monday at 10:30 just sign up for any paid service here at Option Pit... or call 888) 872 3301.
Questions about anything? Leave a comment below!
Mark Sebastian
Founder & CEO, Option Pit
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