Hot tech stocks usually generate the most buzz on Wall Street. But they aren't always the best picks. Yes, the stocks that have delivered the most gains over the past few decades have been predominantly tech stocks, like Amazon and Apple. But they've also been the victims of blowups and buyouts. In other words, they're risky, and they often come with a high risk vs. reward proposition.
Think of it this way. Even if you find one Amazon, you still need to spread out your investments over a group of hot growth stocks because, in the early stages, you won't know which tech stock will hit it big. If you own around 30 stocks, you need some of them to be reliable winners so your growth bets can do their work while a large percentage of your money is protected.
Strong consumer goods companies are excellent candidates for stock picks that can provide high growth potential without adding high risk. Over the past few years, Lululemon Athletica (LULU -0.88%) has demonstrated that it's running an exceptional business, and its stock has outperformed the market by a wide margin. It's still a growth engine, and it offers some serious benefits for investors. Here are three reasons to buy it today.
1. It has an incredible community of loyal fans
Lululemon has built up a community of shoppers who pay up for its patented fabrics and workout-inspired designs. While it has fostered this community over time with features like in-store classes and products that fit a fitness-focused lifestyle, it launched a membership program this year that has already attracted 17 million members. The program offers benefits like early access to sales and members-only events. This develops the relationship further as more companies get on the athleisure bandwagon and market competing lines.
The company is also experimenting with new ventures to keep its customers close, such as its acquisitions of Mirror and a new partnership with Peloton to be its exclusive content creator.
The results illustrate that this is all working. Revenue increased 19% year over year in fiscal 2023 (ended Jan. 28), with comparable sales up 13%.
2. It consistently pumps out high profits
It's not only sales that are up, but Lululemon reliably spins sales into profits. It targets an affluent customer base and charges premium prices for its premium products, and the cycle of building loyalty leads to a high full-price sales rate. Gross margin expanded by 2.9 points in 2023 to reach 58.3%, and operating margin widened by 5.9 points to 22.2%. This is usually the golden metric for measuring profitability, and Lululemon is a star here. In fact, it has unmatched operating margins that outdo any of its competition, including other premium names like Nike and On Holding.
LULU Operating Margin (TTM) data by YCharts
Adjusted earnings per share (EPS) increased from $10.07 in 2022 to $12.77 in 2023.
3. Its core market is growing
Athleisure has been growing in popularity for a while, but it really took off when the work-from-home trend exploded early in the pandemic. Even though office wear is now returning, athleisure isn't going anywhere. It's actually still growing, and it's expected to increase at a compound annual growth rate of 9.3% through 2030, according to Grandview Research.
As one of the leading athleisure companies, Lululemon is poised to benefit from organic growth based on these trends alone.
Don't miss this opportunity
If investors needed any further encouragement, Lululemon stock dropped after its fourth-quarter earnings report last week despite another round of top results. Wall Street was disappointed in its guidance, which came in lower than expected.
I wouldn't worry about that too much. Short-term dips present opportunities for smart investors; look for long-term trends, and don't get worked up about one quarter of disappointing guidance. It's also not all that disappointing, with management still guiding for double-digit growth for the full year at 11%. The operating climate isn't very hospitable right now, and the guidance is a reflection of that as opposed to a reflection of its own performance.
Furthermore, CEO Calvin McDonald said that the company is well ahead of its longer-term strategic goals. That gives it some leeway for lumpy results on the way to reaching those goals, which most companies experience.
Finally, Lululemon surpassed its fourth-quarter guidance, and it's possible that it will do that again in 2024. Conservative guidance might be discouraging, but it's a setup for reporting better-than-expected earnings rather than setting the stage for big disappointments.
After the fall, Lululemon stock trades at 33 times trailing-12-month earnings, or close to its cheapest valuation in more than five years. Lululemon is a great pick for a solid stock that should reward shareholders for decades.
