New Trade – $LULU: Downward Dog?

by Dan April 17, 2015 2:15 pm • Commentary

Since the start of April we have made a few defined risk bullish Trades in consumer discretionary stocks:

Macy’s (M):  Trade Update – Macy’s ($M) – The Parade Rolls On

Nike (NKE):  New Trade – $NKE With Wings?

Walmart (WMT):  New Trade – People of $WMT

These trades were in large part to attempt to pick some stocks that we thought would be viewed as winners if the improving jobs data from January and February were to continue into the Spring.  One thought is that while we are broadly skeptical about the health of the economic recovery, the combination of lower oil and declining jobless claims should be a perceived benefit to certain stocks in the consumer discretionary space.  That being said, have placed bearish trades on a few sectors and market caps that we deem to be vulnerable in the event we see a turn lower in the data:

QQQ: New Trade – $QQQ The Curtains

IWM: New Trade – $IWM: Russell, Your Looks Are Becoming a Problem

XLP: New Trade – $XLP: Did You Try Staples?

But I find the following charts troubling:  

NKE had recently broken out to new highs on positive news, and quickly gave up all the gains and now breaking near term support at $100:

NKE ytd from Bloomberg
NKE ytd from Bloomberg

WMT having had a massive breakout late last year only to give back all the gains, and now blast through 1 year support at $80:

WMT 1yr from Bloomberg
WMT 1yr from Bloomberg

Both these trades are suddenly at risk, but when I entered both I was very clear that the premium that I was risking was a very clear stop on the downside as at important support levels. While it sucks to having losing trades on these, I feel pretty decent as to how and why they were structured.

Which brings me to Lululemon (LULU) a stock that since last fall has seen a bit of a resurrection, up 85% from the 52 week lows:

LULU 1yr chart from Bloomberg
LULU 1yr chart from Bloomberg

The company suffered from a series of misfires in 2014, but has seemingly righted the ship. But here is the problem. The stock’s recent gains (up 20% on 2015 already) more than compensates for renewed enthusiasm as the stock is trading at 35x expected fiscal 2016 earnings growth of 15%. Especially when you consider that massive NKE trades 25x expected fiscal 2016 earnings growth of 12%.  NKE reported earlier this week that they are becoming very focused on women and are committing serious resources to increase sales of women’s apparel by $2 billion by 2017.  What’s interesting to me about that $2 billion number, that is equivalent to LULU’s expected sales this year.

LULU doesn’t report earnings again until June, but in the meantime, if NKE is rolling over, then I think it’s a pretty good bet that LULU is not far behind.

TRADE: LULU ($66.70) Buy to open May 65 put for 1.30

Break-Even on May Expiration:

Profits:  gains below $63.70

Losses: between 63.70 and 65 lose up to 1.30, max loss of 1.30 above 65

Rationale:  On a move to the long strike I will look to spread into a vertical by selling a lower strike put to create a vertical put spread and lower my break-even on the trade.