As Lululemon (LULU, Financial) shares have surged past $100 per share, and money managers have been left scratching their heads. How is it possible that a yoga retailer has a $7 billion market cap?
Money managers like Bill Laggner and Whitney Tilson have highlighted that LULU is a grotesque example of momentum investing that has re-emerged after the Federal Reserve flooded the market with liquidity.
Whitney Tilson even called LULU a "fad" stock last year.
"However, they've been overpriced for months and they keep going up because there's so much liquidity sloshing around. Also there's a lot of momentum in some of these stocks that's running them up. A good example is a company that makes yoga apparel called Lululemon Athletica. They have a nice little niche and they're growing rapidly--their apparel is hot and margins are very high. But it's trading at an extreme valuation and it looks like a fad to me--It's yoga clothing! We think the fad could pass and are quite certain that the valuation is extreme."
However, LULU stock doubled after he made this critique.
Goldman Sachs recently upped their price target to $105 and issued a bullish report on LULU.
However, when one compares LULU to another apparel company like Adidas it becomes even more evident that LULU is set for a dramatic fall.
Adidas has $17 billion in revenues while LULU only has $700 million. Shockingly, LULU has a market cap of $7 billion while Adidas only has a market cap of $14.8 billion. Blue chip apparel brands sell for 1-2X sales but LULU sells for 10X sales. In a best case scenario, an apparel maker can aspire to be like Adidas or Nike (NKE, Financial).
However, for LULU to eventually to grow into $5 billion of sales you need to see 600 LULU stores in North America. Most yoga directories list 1,000 yoga studios in the U.S. meaning that there would have to be one retail store for every two yoga studios. Clearly, there would have to be exponential growth in yoga to justify this level of store expansion.
LULU stock is experiencing a huge short squeeze which makes it dangerous to short. Nonetheless, at some point the parabolic rise in LULU will end in tears for most momentum investors.
Read more about hedge fund managers at:
http://fundmanagernews.com/
Money managers like Bill Laggner and Whitney Tilson have highlighted that LULU is a grotesque example of momentum investing that has re-emerged after the Federal Reserve flooded the market with liquidity.
Whitney Tilson even called LULU a "fad" stock last year.
"However, they've been overpriced for months and they keep going up because there's so much liquidity sloshing around. Also there's a lot of momentum in some of these stocks that's running them up. A good example is a company that makes yoga apparel called Lululemon Athletica. They have a nice little niche and they're growing rapidly--their apparel is hot and margins are very high. But it's trading at an extreme valuation and it looks like a fad to me--It's yoga clothing! We think the fad could pass and are quite certain that the valuation is extreme."
However, LULU stock doubled after he made this critique.
Goldman Sachs recently upped their price target to $105 and issued a bullish report on LULU.
However, when one compares LULU to another apparel company like Adidas it becomes even more evident that LULU is set for a dramatic fall.
Adidas has $17 billion in revenues while LULU only has $700 million. Shockingly, LULU has a market cap of $7 billion while Adidas only has a market cap of $14.8 billion. Blue chip apparel brands sell for 1-2X sales but LULU sells for 10X sales. In a best case scenario, an apparel maker can aspire to be like Adidas or Nike (NKE, Financial).
However, for LULU to eventually to grow into $5 billion of sales you need to see 600 LULU stores in North America. Most yoga directories list 1,000 yoga studios in the U.S. meaning that there would have to be one retail store for every two yoga studios. Clearly, there would have to be exponential growth in yoga to justify this level of store expansion.
LULU stock is experiencing a huge short squeeze which makes it dangerous to short. Nonetheless, at some point the parabolic rise in LULU will end in tears for most momentum investors.
Read more about hedge fund managers at:
http://fundmanagernews.com/
