Hot Wall Street Stocks and The best way to know when to sell a stocks online
Fri, Sep 28, 2012
Never underestimate a woman’s willingness to spend an extra few bucks to look better.
That’s what we said about Lululemon (NASDAQ:LULU) back when the high-end yoga apparel maker hit the public markets in 2007. Since then Lululemon has become one of the Best-Performing Stocks In The World.
Lululemon shares are worth five times more than they were then when it IPO’d at the all-time market top in late 2007. And its shares are up more than 3200% from their 2008 lows when the financial world would get its first look at how in-demand Lululemon’s products are despite horrific economic conditions.
But this week investors got their first real sign Lululemon’s run may be coming to a quick, painful, and costly end.
The signal came from one of the leading short sellers (someone who profits when a stock goes down) in the world, David Einhorn, was rumored to be getting positioned to profit from a fall in Lululemon’s shares. And with a momentum stock which is as valued as highly as Lululemon is (its Price-to-Sales ratio is 10 times higher than the P/S ratio for the entire apparel sector), there’s a lot of room to fall.
But is Lululemon’s run really over? Here’s the best way to tell when any Top-Performing Stock is headed for a fall.
Time to Bet Against Lululemon?
This week Lululemon shares had their worst trading day since the market meltdown in 2008.
Shares fell 7% in a single day after rumors spread that David Einhorn of Greenlight Capital had bet against Lululemon shares. Einhorn is famous for making fortunes off overvalued stocks and catching outright frauds early on. So when the Einhorn rumor spread, there was a lot of room to fall for Lululemon’s shares.
For now though, there’s still no official comment from the Einhorn camp on the Lululemon rumors.
So we don’t know anything with Einhorn and Lululemon. But we do know enough about the situation to determine when to sell and bet against Lululemon shares just by looking at past history of other high-flying stocks.
Here’s what I mean.
Another Case of Great Expectations
Lululemon appears to still be one of the most fundamentally sound companies in the world.
Just last quarter the company reported a 33% increase in sales. The quarter included a 15% increase in same-store sales. The biggest red mark on the report was a decline in gross margins from a bit over 57% to just over a still-very-strong 55%.
Everything is great fundamentally. But there’s more to a stock trade than simple fundamentals and growth (or investing would be much easier).
There’s rarely an obvious time to buy or sell a stock.
As the old adages say, the market can stay irrational far longer than you can stay solvent, the trend is your friend, etc.
Cheap stocks tend to stay cheap and expensive stocks tend to stay expensive.
However, an analysis of Lululemon’s current position would give us a lot of reasons to see when it’s time to sell it and when it’s time to jump on the short-side and go for the profitable ride when this stock falls flat.
In fact, Lululemon has entered a classic set up which investors can use to identify when to sell Lululemon (or any other stock or investment for that matter) at the right time.
You see, the reason Lululemon shares have performed so well is because the amazing consistency with which the company is able to outperform Wall Street’s expectations.
In the past year Lululemon has consistently beat Wall Street’s earnings estimates. The company beat estimates by between 4% and 9% each of the past four quarters.
After each beat, analysts responded by raising their expectations. A year ago analysts expected Lululemon to earn $1.26 per share this year. Three months ago they said the company would earn $1.62 per share. Now they say Lululemon should make $1.76 per share this year.
With Contrarianinsights.com,You can check all the information on stocks,The same trend is true for 2014 earnings expectations. They’ve risen from $1.79 to $2.24 with the past year.
Of course, even these steady growth numbers, if met, will still give Lululemon shares a P/E ratio of 35 to 40.
The Best Way to Know When to Sell a Stock
It’s a classic set up, right?
Everything is going right and the stock is climbing.
All of this earnings increases sound great. But they might be signaling some significant risks underlying the future performance of Lululemon shares.
Well, here’s how to tell when the sharp and costly downturn is about to come.
When the company releases great news like beating earnings estimates again, a surge in sales, or some other extremely positive news, and shares do NOT go up on the news, this is the time to sell it all and run away.
When shares react to good or great news badly, run away. The risks are far greater than the rewards of holding on.
After all, if shares fall after good news, what will happen when the news is bad?
Whatever happens, it won’t be good.
We’ve watched Lululemon shares climb steadily for the past couple of years. Expectations have grown exceptionally high.
David Einhorn may or not see the same set up we do in Lululemon. But we know not to be against these shares until we see Lululemon shares fall on good news.
Executive Editor, Contrarian insights
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