Why I bought Lululemon Athletica – M. Arold (LULU)

Manager: Michael Arold

Model: Technical Swing

Michael Arold manages Covestor’s Technical Swing model, which uses multiple technical indicators. Arold takes a discretionary view of trending stocks and sectors, based on the fundamentals of likely moves in the opposite direction. It’s a short term model looking to capture profits in short term price swings. He recently added Lululemon Athletica (NASDAQ: LULU) to the portfolio, so we asked Arold to share his investment thesis with us. His response:

The key to my momentum-based investment style is to look for strong stocks in strong sectors. Lululemon fits the profile: the Dow Jones US Clothing and Accessory Index (DJUSCF) outperformed the S&P 500 by over 600 pbs YTD, while LULU outperformed the Clothing Index by almost 2500 bps (as of 5/11). The stock is up 39% in 2011 alone and I believe the momentum could continue.

Lululemon is not cheap, trading at 38 times forward earnings, according to Yahoo Finance, but earnings have been growing fast: recent quarterly results grew by 92% YoY. The high growth, high beta stock held up fairly well during the recent market consolidation, which actually prompted me to buy shares.

Analysts, however don’t agree on the company outlook, which I actually consider a positive: seven analysts rate LULU an outperform/buy, 10 a hold and 5 an underperform/sell, according to Yahoo Finance. Diversity in ratings leaves room for upgrades, which usually boosts stock prices.

There is a large fraction of short sellers: currently, 18% of float are held short, a relatively high number. Should LULU continue to act strong, forced short covering (a “short squeeze”) could move shares even higher. So high short interest is not necessarily negative.

I like LULU’s vision and positioning in the market space. According to a recent investors presentation, the goal of the company is “to become the number one women’s athletic apparel brand”, a very focused vision statement. Marketing obviously is working: I did my personal “channel checks” and recently asked my wife about her thoughts on Lululemon. Her comments were quite enthusiastic, which confirmed that LULU probably has a loyal customer base, who is excited about the brand.

Sources:

DJUSCF, LULU performance information from Google Finance, http://www.google.com//finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=1&chfdeh=0&chdet=1305159972208&chddm=35581&chls=IntervalBasedLine&cmpto=INDEXSP:.INX;NASDAQ:LULU&cmptdms=0;0&q=INDEXDJX:DJUSCF&

LULU forward P/E information, short information, analyst ratings from Yahoo Finance, https://finance.yahoo.com/q?s=lulu

“ICR XChange lululemon athletica inc.” Lululemon Athletica, 01/11. http://files.shareholder.com/downloads/LULU/1254340943x0x436094/28c816b4-7b21-49ee-a49e-bdeb51797153/ICR_Jan11_Final.pdf