Schaeffer's Trading Floor Blog

Weekly Contrarian: Bears Beware! Lululemon Continues to Defy the Odds

LULU could be positioned for a contrarian boon, should Wall Street change its tune

by 10/3/2012 10:53 AM
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In a recent article on CNBC.com, the author of "Can Lululemon Keep Proving the Skeptics Wrong?" waxed optimistic about Lululemon Athletica inc.'s (NASDAQ:LULU) flourishing fundamentals, with the yoga-wear guru boasting a roughly 50% growth in second-quarter profit, in addition to higher revenue. This is pretty impressive, he maintains, for a company that doesn't have an advertising budget.

However, skeptics remain, with well-known pessimist David Einhorn rumored to be among the many investors shorting a stock that is "trading at a lofty 50 times earnings."

Not easily discouraged, CEO Christine Day highlights the company's core fundamental strength, explaining, "We're in a fortunate position to be able to continue to invest in our product. The way we do margins and vertical integrated retail give us a competitive advantage to invest at levels the more price conscious brands can't do."

To the skeptics, Day adds, "I think valuing the company is the market's job and my job is actually creating value and I think we have a healthy balance sheet, one of the top business models in retail while delivering phenomenal growth. I think our story is very intact."

Contrarian Takeaway

On the charts, LULU has been nothing short of impressive, with the shares adding roughly 61% on a year-to-date basis. Plus, the equity has outperformed the broader S&P 500 Index (SPX) by more than 27 percentage points during the past 40 sessions. The stock found a solid foothold atop its 20-day moving average following its most recent consolidation attempt and has been bouncing steadily higher along this rising trendline since early August.

However, as the article intimates, the stock is swathed in bearish sentiment. In the options pits, speculators have scooped up two puts for every call over the previous 10 sessions. What's more, this 10-day put/call volume ratio ranks higher than 95% of other such readings taken in the last year, suggesting puts have been bought to open over calls at a near annual-high pace in recent weeks.

Additionally, LULU's Schaeffer's put/call open interest ratio (SOIR) of 1.34 ranks in the 73rd percentile of its annual range. In other words, short-term speculators are more put-heavy than usual toward the equity.

This cloud of doubt has drifted outside of the options arena, as well, with short interest accounting for nearly one-fifth of the stock's available float. Among the brokerage bunch, no fewer than nine out of 18 covering analysts still maintain a "hold" or "sell" suggestion toward the equity. Also, the consensus 12-month price target of $80.64 represents a slim 5.6% premium to LULU's closing price of $76.35 on Tuesday, Oct. 2.

From a contrarian perspective, the equity is poised to continue its run higher. With the door wide open for a round of upgrades and/or price-target hikes in light of LULU's strong fundamental and technical showing, a capitulation from the weaker bearish contingent could provide the stock with a fresh wave of buying power.

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