Lululemon Hits 16-Month High Despite Citi Downgrade

Analysts are expecting retail stocks like LULU to benefit big from GOP tax reform

Managing Editor
Jan 2, 2018 at 2:13 PM
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Lululemon Athletica Inc. (NASDAQ:LULU) is starting off the year with an impressive slew of analyst attention, as the athletic apparel stock received no fewer than three price-target raises today. Telsey Advisory Group hiked its forecast to $92 from $84, while J.P. Morgan Securities upped its target to $87 from $79. The third raise, to $88 from $78, came from Citigroup -- despite the brokerage firm simultaneously downgrading LULU stock to "neutral" from "buy." 

In a note to clients, Citi analyst Paul Lejuez explained his rationale: "While LULU may eventually benefit from the cut in U.S. corporate tax rates, the timing/magnitude remain uncertain given how they are structured for tax purposes." All told, the brokerage firm today raised price targets for 19 retail names, citing expectations for a "cash bump" stemming from the recently passed tax reform legislation.

Lululemon stock is up 1.4% at $79.67 at last check, just off a fresh 16-month high of $80.27 set earlier in the session. These impressive gains are continuing LULU's stellar bull run, with the stock up over 56% in the past nine months.

As such, sentiment is mostly upbeat toward the stock. There are 26 analysts covering Lululemon, and 16 of those say it's a "buy" or "strong buy," with zero "sell" recommendations to be found -- and today's price-target hikes represent just the latest in a recent wave of similarly bullish notes.

However, options traders aren't convinced. Every single one of LULU's top five open interest positions is a January 2018 put strike, with total put open interest of 64,807 contracts easily outweighing call open interest of 48,519 contracts. Likewise, short interest accounts for a healthy 6.4% of the equity's float.

For traders expecting LULU to benefit from a continued unwinding of this lingering pessimism, now is an ideal time to buy options on the stock. Its Schaeffer's Volatility Index (SVI) of 33% ranks in just the 11th percentile of readings from the past year -- which means short-term options are pricing in unusually low volatility expectations at the moment.

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