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Why To Keep Avoiding Lululemon

Back in early September 2020 I showed you 1 Reason To Avoid Lululemon stock to protect your retirement portfolio.

Today, I give an update after it released its latest quarterly earnings and tell you Why To Keep Avoiding Lululemon. 

You can read the full article above.

But if you don’t want to; here’s a quick recap of why I said to avoid it previously…

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1 Reason To Avoid Lululemon

It’s Enormously Overvalued

Normally in these articles I talk about profitability, cash flow, the affects coronavirus is having on a company’s financials among other things.

But frankly none of those matter with Lululemon (LULU) due to its huge valuation.

Before I get to that though I need to tell you what Lululemon does.

Has it seemed like more and more woman – and men – have been wearing leggings in recent years?

That’s because they have.

In large part due to Lululemon popularizing the wearing of leggings for working out.

Lululemon creates, produces, and sells athletic apparel for men and women… It did such a great job that its now got a $42.2 billion market cap as of this writing which is up huge this year.

So far this year its stock price grew from $233.42 per share on January 2nd, 2020 to $330.38 as of this writing.

This is an increase of 41.5% this year so far.

And it’s also up enormously from its 2020 lows during the first stages of the coronavirus pandemic in March from $138.98 per share.

This is an increase of 138% from its low this year to its current share price.

It’s great for shareholders… But if profits and cash flows don’t rise in line with the rapid rise in share price it leads to stocks being enormously overvalued.

And Lululemon is.

  • Its current P/E is 78.6.
  • Its current P/CF is 62.4.
  • And its current forward P/E is 77.5.

I look to buy companies with valuations below 20 on all these metrics to consider the company undervalued…

Lululemon crushes this threshold.

Why below 20?

Because that means the company is at worst fairly valued… And if its significantly under 20 that means the company is undervalued.

When a stock is fairly valued or undervalued it gives you more margin of safety in investing terms.

This means you have a better chance of earning high investment returns owning its stock over time.  And these combined make the stock a less risky investment.

With Lululemon stock being so overvalued it means there is no margin of safety… That you have a far lower likelihood of making money owning its stock over time.  And these make the stock riskier.

Lululemon will continue growing and being a leader in this space.

But I require as much of a margin of safety and room for error as possible when investing in stocks because bad stuff always happens at some point.

If you’re buying Lululemon stock today there’s zero room for error due to its huge valuation.

For this reason, I recommend you stay far away from investing in Lululemon… Even though it’s an otherwise great stock.

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This thesis to avoid investing in Lululemon due to its crazy valuation continued to play out after it released its most up to date quarterly earnings on March 30th.

  • Fourth quarter revenue jumped 24% to $1.7 billion.
  • Fourth quarter operating income rose 10% to $457.9 million.
  • And the company opened six new stores in the quarter to bring total store count to 521.

This is all fantastic… But what about the full year?

  • Revenue rose 11% to $4.4 billion.
  • Operating profit fell 8% to $820 million.
  • And the company opened 30 new stores in the full year.

This is more of a mixed bag here, but the profit dropping isn’t good.  But it’s also not a surprise due to Covid related store closures for a good chunk of the year.

Revenue rose in both the quarterly period and full year 2020 due in large part to a 52% increase in Lululemon selling direct to consumer via its website and other online portals.

This will help them going forward as well because these are higher margin transactions.

Because of the profit fall – Lululemon shares are down 4% since I first told you to avoid them back on September 11th, 2020.

This is not surprising.

When companies have sky high valuations any fall in revenue or profits will cause share prices to fall almost 100% of the time.

They must keep performing spectacularly just to keep up with the high valuation and expectations.  When they don’t, they fall.

This is why you need to avoid investing in massively overvalued stocks.

And this gets us to what its valuation is now… is it cheap enough to buy?

Its P/E is now 66.9.

Its P/CF is 49.1.

And its forward P/E is 45.7.

These show that its cheaper than it was back in September… But that its still far too overvalued to consider buying.

For this reason, I continue recommending that you avoid buying its stock.

I want an enormous margin of safety for you because this eliminates risk AND gives you higher investment returns.

I don’t want you to have just one or the other of these things.  I want you to have both.

And that will still require some patience when it comes to Lululemon because it’s still too overvalued to buy.

Remain patient and wait to buy Lululemon.

And in the meantime, use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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