Read This Before You Think About Selling Lululemon Athletica

Should you sell lululemon athletica (Nasdaq: LULU  ) today?

The decision to sell a stock you've researched and followed for months or years is never easy. But if you fall in love with your stock holdings, you risk becoming vulnerable to confirmation bias -- listening only to information that supports your theories, and rejecting any contradictions.

In 2004, longtime Fool Bill Mann called confirmation bias one of the most dangerous components of investing. This warning has helped my own personal investing throughout the Great Recession and the recent volatility throughout early August. In this series, I want to help you identify potential sell signs on popular stocks within our 4-million-strong Fool.com community.  

Today I'm laser-focused on Lululemon, ready to evaluate its price, valuation, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, Lululemon has risen 207.0% versus an S&P 500 return of 9.1%.  Investors in Lululemon have every reason to be proud of their returns, but is it time to take some off the top?  Not necessarily. Short-term outperformance alone is not a sell sign. The market may be just beginning to realize the true, intrinsic value of Lululemon.  For historical context, let’s compare Lululemon’s recent price to its 52-week and five-year highs. I've also included a few other businesses in the same or related industries:

Company	Recent Price	52-Week High	5-Year High
Lululemon	$48	$64.49	$64.49
bebe stores (Nasdaq: BEBE  )	$6.05	$8.25	$26.90
Finish Line (Nasdaq: FINL  )	$17.13	$23.64	$23.64
Under Armour (NYSE: UA  )	$55.83	$82.95	$82.95

Source: Capital IQ, a division of Standard & Poor's.

As you can see, Lululemon is down from its 52-week high. If you bought near the peak, now's the time to think back to why you bought it in the first place. If your reasons still hold true, you shouldn't sell based on this information alone.

Potential sell signs
First, let's look at the gross margins trend, which represents the amount of profit a company makes for each $1 in sales, after deducting all costs directly related to that sale. A deteriorating gross margin over time can indicate that competition has forced the company to lower prices, that it can't control costs, or that its whole industry's facing tough times. Here is Lululemon's gross margin over the past five years:

Despite some volatility, Lululemon has been able to grow its gross margin, which tends to dictate a company's overall profitability. This is solid news; however, Lululemon investors need to keep an eye on this over the coming quarters. If margins begin to dip, you'll want to know why.

Next, let's explore what other investors think about Lululemon. We love the contrarian view here at Fool.com, but we don't mind cheating off our neighbors every once in a while. For this, we'll examine two metrics: Motley Fool CAPS ratings and short interest. The former tells us how Fool.com's 180,000-strong community of individual analysts rate the stock. The latter shows what proportion of investors are betting that the stock will fall.  I'm including other peer companies once again for context.

Company	CAPS Rating (out of 5)	Short Interest (% of Float)
Lululemon	*	16.2
bebe stores	**	4.9
Finish Line	*	8.2
Under Armour	****	7.1

Source: Capital IQ, a division of Standard & Poor's.

The Fool community is rather bearish on Lululemon. We typically like to see our stocks rated at four or five stars. Anything below that is a less-than-bullish indicator. I highly recommend you visit Lululemon’s stock pitch page to see the verbatim reasons behind the ratings.

Here, short interest is at a high 16.2%. This typically indicates that large institutional investors are betting against the stock.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Lululemon had to convert its current assets to cash in one year, how many times over could the company cover its current liabilities? As of the last filing, Lululemon has a current ratio of 5.93. This is a healthy sign. I like to see companies with current ratios equal to or greater than 1.5.

Finally, it’s highly beneficial to determine whether Lululemon belongs in your portfolio -- and to know how many similar businesses already occupy your stable of investments. If you haven't already, be sure to put your tickers into Fool.com's free portfolio tracker, My Watchlist. You can get started right away by clicking here to add Lululemon Athletica.

The final recap

Lululemon has failed only two of the quick tests that would make it a sell.  This is great, but does it mean you should hold your Lululemon shares? Not necessarily. Just keep your eye on these trends over the coming quarters.

In order to do that, I strongly recommend clicking here to add Lululemon to My Watchlist to help you keep track of all of our ongoing coverage of the company.