Some of the best investment returns can be achieved by owning businesses that are registering impressive revenue and profit growth. In this way, strong fundamental gains can drive share prices higher. Long-term investors can be rewarded as compounding takes over the portfolio.
It's typical that these growth stocks aren't trading at attractive valuations. And this can discourage investors who desire a margin of safety before putting capital at risk. However, sometimes these types of companies fall out of favor with the investment community for a number of reasons, presenting an interesting opportunity.
Here's one growth stock that's down an eye-popping 66% from its peak (as of Oct. 9) that investors should consider buying right now.
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Don't ignore the obvious challenges
Clearly, Lululemon Athletica (LULU 0.18%) is having some issues if its share price has dropped so much. One of the trends spooking investors is softer demand in the U.S. Sales domestically were flat in the latest fiscal quarter (Q2 2025 ended Aug. 3) compared to the year-ago period.
Despite Lululemon being a leader in the athleisure category, it still faces stiff competition, as is the case when it comes to retail and apparel. Lululemon's huge success in the past drew the attention of rivals looking to capitalize on consumer demand in this part of the industry. Alo Yoga and Vuori are some premium names that have become well known.
On the lower end of the market, there is competition from the likes of Fabletics and Gymshark, for instance, but also from retail heavyweights like Amazon and Costco Wholesale that sell Lululemon dupes.
Competitive pressures mean that Lululemon must always aim to be on top of its game when it comes to product innovation. Management admits it hasn't done the best job here lately. And the plan now is for 35% of the inventory assortment to come from new styles next year, up from 23%.
Investors can blame both the business and the macro environment that has hurt consumer spending. Either way, Lululemon isn't growing like it used to. And the market isn't happy about that.
This company possesses very favorable qualities that point to long-term success
Lululemon might just be hitting a temporary speed bump. Its brand is still highly regarded among consumers. The premium nature of the company's offerings commands pricing power, as demonstrated by an excellent Q2 gross margin of 58.5%. Apple's popular hardware devices come up well short of Lululemon's gross margin, which is a surprising data point.
Despite slower growth trends, Lululemon has a lot of potential. It's making progress selling merchandise in the men's category, with sales here increasing faster than for women in the second quarter. The business has evolved into much more than a purveyor of women's yoga pants.
Foreign markets present a big opportunity for the brand. Lululemon is opening new stores across the world, but the top focus is further penetrating the Chinese market. Revenue in the country jumped 25% in Q2. And Lululemon is leaning in, with plans to open many new stores there.
As long as the leadership team keeps the brand's strength as a top priority, all signs point to much higher revenue and profit for the business five years down the road.
The valuation presents an attractive risk-reward setup
The market might be overreacting and viewing Lululemon in too much of a negative light. Shares have gotten so beaten down that they now trade at a forward price-to-earnings ratio of 13.1. As the business fundamentals start to improve, there is a very good chance for valuation expansion in the years ahead.
The necessary ingredients are there for Lululemon to generate impressive returns over the next five years. This doesn't mean the stock can't keep declining after an initial purchase. However, investors seeking a high-quality business trading at a cheap valuation can't complain about the opportunity the market is presenting.
