1-Star Stocks Poised to Plunge: lululemon?

Based on the aggregated intelligence of 170,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, yoga gear retailer lululemon athletica (Nasdaq: LULU  ) has received the dreaded one-star ranking.

With that in mind, let's take a closer look at lululemon's business and see what CAPS investors are saying about the stock right now.

lululemon facts

Headquarters (Founded) Vancouver, Canada (1998)
Market Cap $3.2 billion
Industry Apparel clothing
Trailing-12-Month Revenue $564 million
Management CEO Christine Day (since 2008)
CFO John Currie (since 2007)
Return on Equity (Average, Past 3 Years) 35.1%
Cash/Debt $178.17 million / $0
1-Year Return 77%
Competitors Nike (NYSE: NKE  )
Under Armour (NYSE: UA  )
Finish Line (Nasdaq: FINL  )

Sources: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS.

On CAPS, 35% of the 617 members who have rated lululemon believe the stock will underperform the S&P 500 going forward. These bears include All-Star STAINEDGLASSER, who is ranked in the top 10% of our community, and bofors.

This past summer, STAINEDGLASSER tapped lululemon as a particularly sour opportunity: "Yes Yoga is a big trend right now, however their clothing is not unique, not that attractive, and is expensive! My gut tells me that in this economy, people are still watching their bucks and these items won't make the buy list."

While lululemon has experienced some steady growth in recent years, many in our community think its shares are just too hot to touch right now. The stock is up 77% over the past year and trades at a lofty price-to-cash flow of 26 -- a premium to publically traded foes Nike (15.2), Finish Line (5.6), and even the high-flying Under Armour (24.2). With the apparel industry as fickle as it is, CAPS member bofors believes lululemon shares are primed for the proverbial pullback:

(1) [lululemon] appears maintained a ceiling at $45 for the last six months. ...
(4) [lululemon's] P/E ratio of 37 cannot be maintained because its growth rate has to slow.
(5) [lululemon's] products are clearly overpriced fads, whose novelty is certainly wearing off years after their introduction.
(6) [lululemon's] revenue will be affected by discount and non-discount imitators including Nike. ..

In short, although [lululemon]continues to be an extremely successful company it appear quite that the rapid downfall of its share price is being widely anticipated and promoted. Otherwise, it has a very clear pattern of wide oscillation currently.

What do you think about lululemon, or any other stock for that matter? If you want to retire rich, you need to protect your portfolio from any undue risk. Staying away from dangerous stocks is crucial to securing your financial future, and on Motley Fool CAPS, thousands of investors are working every day to flag them. CAPS is 100% free, so get started!

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Nike is a Motley Fool Stock Advisor pick, Under Armour is a Rule Breakers recommendation, and Under Armour is a Hidden Gems choice. The Fool owns shares of Under Armour. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Fool's disclosure policy always gets a perfect score.


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  • Report this Comment On October 26, 2010, at 10:45 AM, gladRocks wrote:

    For the guy who based his opinion on lulu's product being not that attractive, my wife saw all the other women in her yoga class with it and had to have it...and to compare it with the discount stuff is like comparing Walmart with Saks...Dell with Apple...say what your want about the price of their stock, but their product is attractive, exclusive and women love it like they love makeup...try getting them to give up their favorite makeup...

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