Why Big Money Investors Love lululemon athletica

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: lululemon athletica (Nasdaq: LULU). Are institutions bullish or bearish when it comes to this maker of stylish activewear?

Foolish facts

Data current as of Feb. 21.

Selling lululemon is one of the worst investing mistakes I've made. And not just because of the loss we took in our portfolio. What made this a bad pick was my process, which was largely driven by fear.

How so? As the Great Recession took a chunk out of the economy, I feared that women would put purchases of luxury apparel on hold. And they did, for a while. Year-over-year revenue growth fell from 82% to 31% in 2008, and then to 28% in 2009.

The numbers looked worse on a quarterly basis. Revenue fell year-over-year in 2008's fourth quarter as gross margin fell close to five percentage points. It declined sequentially another 680 basis the next quarter. Spooked by deceleration, I sold.

Never once did I consider that the original thesis for buying -- that management had the skill to organically fund years of growth -- remained intact. Returns on capital remained strong in the midst of expansion-fueled declines in gross margin. Forest, meet trees.

And yet life and the stock market have a way of giving a Fool a second chance, and that's what I have in front of me now. Fool co-founder David Gardner recently named lululemon to our Motley Fool Rule Breakers scorecard, and my colleague Rex Moore last month bought shares for his Rising Stars portfolio.

You can read Rex's full write-up here, but the nut of it is this: lululemon is a well-run company with a loyal fan base that trades for a mild premium when compared to peers such as Under Armour (NYSE: UA). It's a compelling argument that, regretfully, I agree with.

Institutional ownership history

Source: Capital IQ, a division of Standard & Poor's. *Indicates the number of shares owned.

So do most of the Big Money institutions following the stock. As a group, the top 25 owners have been buying steadily since 2008. The top ones have pruned their stakes some in recent quarters -- Fidelity and Capital Research, notably -- but not by enough to suggest anything other than mild profit taking.

Among fund managers, Morgan Stanley's (NYSE: MS) stock pickers have taken a liking to lululemon's yoga-inspired gear. According to Morningstar, the firm's Institutional Mid Cap Growth (MPEGX) fund opened a new position with 1.15 million shares purchased in the December quarter. Andrew Stephens and James Hamel of the highly regarded Artisan Mid Cap (ARTMX) fund added to their stake in lululemon during the same period.

Competitor and peer checkup

Source: Capital IQ. Data current as of Feb. 21.

Every one of these stocks has a good ownership profile. For its part, lululemon enjoys the most institutional and the second-highest engagement among insiders. Founder Chip Wilson, in particular, controls 32.5% of the shares outstanding, according to Capital IQ data.

What makes this interesting is the role Wilson plays at lululemon. He isn't CEO. Rather, he leads branding and innovation and his official title is Chairman, which makes him the voice of shareholders.

And that's important. The top single owner of lululemon shares is directly engaged with efforts to foster the long-term growth needed to boost returns. It's the sort of arrangement that makes me want to own the stock again. I've begun the research process by rating lululemon to outperform in my CAPS portfolio.

Do you agree? Disagree? Let me know what you think of lululemon's products, prospects, strategy and competitive positioning using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

Interested in more info on the stocks mentioned in this story? Add Bebe Stores, Lululemon, Nike, or Under Armour to your watchlist.