Just Another Example of Wall Street's Stupidity

Sometimes, the short-sightedness of the market is astounding. Yesterday's downgrade of lululemon athletica (Nasdaq: LULU  ) by FBR Capital Markets, and the subsequent 6% dip in the company's stock, serves as our most recent example.

What happened?
It has already been well-documented that lululemon is having inventory problems. But unlike inventory issues at competitors Under Armour (NYSE: UA  ) or Nike (NYSE: NKE  ) , lululemon's products are flying off the shelves faster than the company can up supply. If a company is going to have inventory problems, these are the good kind to have.

So it was somewhat surprising that FBR analyst Liz Dunn stated, "The stock appears priced to perfection and we believe any glitch on earnings could result in a sell-off." She she also said that margins will be pressured because of costs.

Here's what's wrong with this:

  1. We already know that supply will start to meet demand in the second half of this year. The company has already said so. When that happens, there should be a pop from the built-up demand.
  2. A stock's price falling because of the possibility of a "glitch" seems odd given that whatever the "glitch" may be, it's most likely temporary.

But my biggest beef with this report comes from Dunn herself, who states, "We believe Lululemon will move to preserve quality at the expense of margins. While this is absolutely the right thing to do in the long term, in the near term the margin ramifications may pressure the shares." (Emphasis added.)

But lululemon has been firing on all cylinders for the past year, with the bottom line improving over 100%, and an average earnings beat of 27.5% in 2010. All of this with the company only having opened just 86 full-service stores in North America -- so it has plenty of room to expand its store count in the coming years.

We at the Fool have been pounding the table for years saying that investors need a three- to five-year outlook on companies they invest in. Our flagship newsletter, Stock Advisor, has shown just how effective this long-term view can be.  Over the past nine years, its average pick is trouncing the market by a remarkable 90%. To get a free 30-day trial of Stock Advisor, simply click here. In the meantime, add lululemon athletica to your scorecard to keep tabs on how it's improving its long-term prospects.

Fool contributor Brian Stoffel encourages such Wall Street behavior, because it helps us individual investors profit.  He owns shares of lululemon athletic. The Motley Fool owns shares of Under Armour and Lululemon Athletica. Motley Fool newsletter services have recommended buying shares of Under Armour, Nike, and Lululemon Athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 27, 2011, at 6:38 PM, bigbuyerr wrote:

    more than one analyst have a rating of sell on this stock including cramer .... what does it say about this article?

  • Report this Comment On May 28, 2011, at 12:28 PM, David369 wrote:

    Bigbuyerr,

    Good point. Just shows you how little research and long term thinking "lightning round" analysts put into their predictions.

  • Report this Comment On May 28, 2011, at 4:24 PM, mountain8 wrote:

    bigbuyerr (does the err mean something?),

    It says that mr Cramer and the author differ in opinions. That's all... oh, except that you indicate there is at least one other analyst (for which you neglect to list names) that agrees with mr Cramer (more than one is two). I'd bet more than one agree with the author.

    I'd say your post is a little weak. And I know at least one other critic agrees with that. Isn't that a coincidence.

  • Report this Comment On May 28, 2011, at 4:28 PM, mountain8 wrote:

    It's possible Mr Cramer is just looking a couple weeks down the road and as we all know, TMF looks a little farther. Apples to Oranges. Grow up.

  • Report this Comment On May 28, 2011, at 10:24 PM, tamr666 wrote:

    I would downgrade F B R. Is this some outstanding business model.

  • Report this Comment On May 29, 2011, at 7:36 PM, nickyv83 wrote:

    If you actually listen to cramer, he stated he would sell shares of lulu bc of near term volatility BUT he would buy call options meaning he is a long term BUYER.

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