1) Since August last year, I've written nearly a dozen times about athleisure company Lululemon Athletica (LULU)...
You can see the archive here. And I discussed the stock most recently on June 10, when I shared bearish comments on the stock from my portfolio manager friend Steven Levinson.
As I also noted in that e-mail...
... one of the keys to being a successful investor is learning about a lot of companies and then following them over an extended period, looking for opportunities when their stocks get clobbered and disconnected from underlying intrinsic value.
I call this developing a big "bench" – like in baseball, where players wait until being put into the game.
Well, I've certainly been following along with Lululemon. But fortunately, I was savvy (and lucky) enough to never pull the trigger...
Lululemon is down nearly 70% from its all-time high less than two years ago. And yesterday, the stock touched another 52-week (and more than five-year) low. You can see the big drawdown in this 10-year stock chart:
The stock has been obliterated this year as the company has faced a range of issues. These include challenges in North America, slower growth in China, product issues, competition, and headwinds from tariffs.
The latest blow came when Lululemon reported second-quarter earnings earlier this month...
The company actually beat profit estimates with earnings per share ("EPS") of $3.10. But revenue of $2.53 billion (up 6%) narrowly missed expectations. Same-store sales in the Americas declined 3% on a constant dollar basis, which was offset by a 13% gain overseas. That resulted in a small 1% increase in overall same-store sales – a significant drop from the company's historical performance.
Lululemon's operating margin also compressed. It fell to 20.7% from 22.8% in the same period last year.
Worse yet, Lululemon cut its revenue and profit guidance for the third quarter and full year. Analysts now expect EPS of $2.20 next quarter (down from $2.87 last year) and $4.94 for the all-important holiday quarter (down from $6.14).
As a result, analysts expect EPS of $12.90 for Lululemon's current year. They expect EPS to then rise to $13.43 for the next year. However, both figures are well below the $14.64 per share that Lululemon earned for its most recent full year.
In light of declining earnings and uncertainty around tariffs, etc., why do I think the stock is still worth keeping an eye on? Because it's an excellent business and the stock is cheap...
Regarding the former, Lululemon has mouthwatering return on equity ("ROE") and operating (pretax) margin:
Even if tariffs crimp margins by a couple of percentage points, the company remains extremely profitable.
And at yesterday's closing price of $159.98, the stock is trading at a mere 12.4 times current-year earnings estimates and 11.9 times next year's. That's approximately half the market multiple for a well-above-average business.
Ah, but might Lululemon be a fad – destined for the dustbin of history like so many other once-popular brands?
Based on my own experience, I don't think so...
My favorite gym shorts, tennis shorts, formal shorts, and polo shirt are all from Lululemon. Even after years of heavy use, they still look and feel great.
But I'm not a typical customer. However, my 25-year-old daughter is... So when I had dinner with her on Sunday night, I asked her about Lululemon. She replied:
I love my Lululemon clothes. They look good, are comfortable, and last forever. And they do tailoring for free.
When I asked her about Athleta, a Lululemon competitor owned by Gap (GAP), she replied:
The clothing I've bought from them didn't last. I'd never buy from them again.
Lululemon right now feels to me a lot like Five Below (FIVE) did when it cratered in April on tariff fears...
Five Below is also an excellent business. But over the past decade, it has seen much lower (and declining) ROE and operating margins than Lululemon:
But consider what happened to Five Below when investors realized that their fears were overblown...
From its April bottom through yesterday's close, the stock is up more than 163% in less than six months. In the chart below, you can see the big drop in April and the recent surge higher...
I'll still be following along with Lululemon to see if it could be poised for a similar incredible rally...
And over at Stansberry's Investment Advisory, if my team and I decide that the stock might be poised for a similar incredible rally to Five Below and looks compelling enough to add to the model portfolio, our subscribers will be the first to know – as always. (If you aren't a subscriber already, find out how to become one as part of a special presentation here.)
2) It would be hard to find a better example of why I've long said that 99% of investors should never, ever short a stock – because you can get destroyed in a heartbeat, even if your analysis is exactly right...
Just look at what happened to anyone unlucky enough to be short the stock of an obvious Chinese pump-and-dump stock fraud – QMMM (QMMM).
I warned my readers to "avoid [the stock] at all costs" in my e-mail on Wednesday, September 3 after it had risen 10 times since mid-April and traded at 185 times revenues. The stock closed that day at $6.98 per share.
QMMM didn't do much over the next few trading days. But the following Tuesday, it opened at $14.95 per share, spiked as high as $303 per share, and closed at $207 per share.
In my more-than-25-year career, I can't recall a stock ever moving so violently in a single day.
The only one that comes anywhere close is pot stock Tilray Brands (TLRY), which hit $300 intraday in September 2018 – and then collapsed (it closed yesterday at $1.18 per share).
I think it's almost certain that speculators in QMMM will have a similar experience. The stock is already down by more than 75% from its peak – closing yesterday at $71.75 per share and giving the company a roughly $4.1 billion market cap. (But once again, it's seeing another big move today...)
If other Chinese pump-and-dump stocks are any guide, QMMM could experience a one-day collapse of 80% or more in the near future.
Why the Securities and Exchange Commission ("SEC") and U.S. exchanges allow Chinese pump-and-dump stock schemes to fleece gullible American investors out of billions of dollars is beyond me...
3) I experienced the benefits of TSA PreCheck yet again...
When I flew out of Newark Airport recently, I avoided a long line – which happens often. And a recent New York Times article confirms my personal experience: It's a no-brainer to get TSA PreCheck (or Global Entry, which includes PreCheck, if you fly internationally at all).
The article's authors analyzed data from some major U.S. airports. Those included the three in the New York area – Kennedy, LaGuardia, and Newark. As the article notes...
At [Kennedy, LaGuardia, and Newark] PreCheck saves travelers five to 10 minutes on average, according to our analysis. But this will depend on the terminal you're flying out of and the time of day you're departing. Sometimes you may save over 30 minutes, sometimes none at all.
Again, I recommend getting TSA PreCheck!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.