Key Points
- Lululemon stock has been experiencing success, reaching a new 52-week high and rewarding patient shareholders.
- However, there are concerns from some market participants, leading insiders to sell shares and analysts to set downside risk in their price targets.
- Even markets are hedging through options, and at $50 a contract, these puts may offer protection from potential losses.
- 5 stocks we like better than Ralph Lauren
The time to celebrate the S&P 500 reaching new 52-week highs has not come yet. Even though the VIX is at its lowest level since 2019, most stocks are benefiting from the bullish sentiment, and a significant profit party is expected.
However, there are some stocks facing bearish pressure. Lululemon Athletica NASDAQ: LULU has been a favorite in the consumer discretionary sector over the past year, with the stock close to reaching new all-time highs. Optimistic investors are anticipating the upcoming earnings announcement to push the stock to new highs, but there is a risk to consider.
Not only have analysts downgraded the stock, but insiders have also been selling a significant portion of their shares, possibly locking in profits before a potential downturn. The stock is valuable, so what can investors do in this situation?
Check, mate
After striking a strategic deal with Peloton Interactive NASDAQ: PTON, Lululemon has been expanding its market share and potential audience. In addition, its inclusion in the S&P 500 has broadened the base of guaranteed buyers of the stock from ETFs and other funds like pensions.
So, why are investors worried despite these bullish developments? The enemy is most effective when distractions arise. Those who understand this may take action early.
For instance, Michelle Sun Choe, the chief product officer at Lululemon, sold 27,981 shares in September 2023, amounting to a total value of roughly $11.2 million. Could insiders be considering the potential risks of overextending their enthusiasm?
Reviewing the options chain at Lululemon could provide insight into where the market is beginning to hedge potential risks. The highest open interest option is a $390 put expiring on December 8th, just a day after the upcoming earnings announcement.
A high open interest typically indicates that most market participants are betting on this scenario, meaning that most options players expect Lululemon stock to decline to $390 a share by December 8th; a 16.4% fall!
While the Consumer Discretionary Select Sector SPDR Fund NYSEARCA: XLY has outperformed the S&P 500 by as much as 12.7% year-to-date, the situation for Lululemon stock is precarious today.
Be pro-active
It seems like your king is in a vulnerable position; what can you do about this situation? The company achieves an industry-leading ROIC (return on invested capital) rate of 28.6%, which could justify buying this stock at any price. However, overpaying, even for a valuable asset, remains a possibility.
Using the PEG (price-to-earnings-growth) ratio can help you determine whether the price you pay today is justified by the potential growth in earnings of the company in the future. Considering that the sector trades at an average of 0.8x PEG, this benchmark can guide your decision-making.
Given that a company like Lululemon is expected to achieve a modest 12.0% in growth while being valued at a PEG of 1.0x, analysts might argue that its 13.9x P/E is not too high to justify an investment today.
This doesn’t mean you should sell your Lululemon stock and opt for an alternative like Ralph Lauren, but it does suggest that you should consider hedging your investment by purchasing those $390 puts as insurance in case the upcoming earnings negatively impact the stock.
At $50.0 a contract, the only concern you’ll have is not protecting enough of your valuable Lululemon stock!
Before you consider Ralph Lauren, you’ll want to hear this.
While Ralph Lauren currently has a “Moderate Buy” rating among analysts, top-rated analysts believe these five stocks are better buys.
