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Finance

A Potential Trading Opportunity in Lululemon Stock

Lululemon Athletica Inc. (LULU) stock is currently trading within an ascending channel.  A move out of the channel could result in a breakout or a breakdown.

LULU designs, distributes, and markets athletic apparel and accessories for women, men, and girls. The company offers pants, shorts, tops, and jackets for both leisure and athletic activities such as yoga and running.

The company has performed well in the pandemic due to its strong e-commerce performance. LULU’s direct-to-consumer revenue through its website soared 94% year over year in the third quarter. As the coronavirus restrictions ease, the company is seeing more foot traffic and leveraging its buy online pickup in store and ship-from-store services.

LULU had $482 million in cash as of the end of the last quarter, compared with $635 million in long-term debt. Though the company has a healthy current ratio of 2.2, indicating it has enough liquidity to meet short-term needs. LULU also has strong profitability numbers with a return on equity of 25.8% and ROIC of 21.2%.

The company has a strong history of revenue growth with sales expected to grow by 24.7% next year. Earnings are expected to rise 46.2% next year. Its stock is overvalued through, with a P/E of 82.6 and a Price to Sales ratio of 11.4.

The stock is up over 50% for the year, but has shown bearish short-term momentum. LULU is rated a “Buy” in our POWR Ratings system.

Take a look at the 1-year chart of LULU below with my added notations:

  Chart of LULU provided by TradingView

LULU has formed an up-channel chart pattern over the past few months. A channel is formed through the combination of a trend line support that runs parallel to a trend line resistance.  When it comes to channels, any (3) points can start the pattern, but it truly takes a 4th or more to confirm it.

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A long opportunity could be entered if LULU were to break the channel resistance.  A short trade could be entered on a break below the channel support.

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Have a good trading day!

Good luck!

Christian Tharp, CMT

@cmtstockcoach


LULU shares were trading at $352.40 per share on Wednesday morning, down $0.82 (-0.23%). Year-to-date, LULU has gained 52.11%, versus a 17.94% rise in the benchmark S&P 500 index during the same period.

About the Author: christian

Christian is an expert stock market coach at the Adam Mesh Trading Group who has mentored more than 4,000 traders and investors. He is a professional technical analyst that is a certified Chartered Market Technician (CMT), which is a designation awarded by the CMT Association. Christian is also the author of the daily online newsletter Todays Big Stock. More…

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