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LULU: Action, Reaction in a Short-Term Correction

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- I love market corrections. The one we're going through now should come as no surprise. Don't believe the headlines that proclaim the sky is falling. I tend to sit closer to the side of CNBC's Larry Kudlow, who says The Economy Isn't Collapsing, Nor Will Stocks. While I am not as bullish on America as Kudlow, I've been around long enough to not overreact to the stock market's natural gyrations.

When the market swoons and stocks tank, investors tend to fall into one of three camps: Panic sell, buy low or do nothing. I often fall into the last two camps. Ultimately, my cash flow at the moment dictates whether I can make considerable buys or if I have to stay on the sidelines. More than three ways exist, however, to react to what amounts to a normal downturn. In fact, I would even advocate for reacting somewhat aggressively during an all-out crash.

Consider Using Options

After Lululemon (LULU - Get Report) reported earnings, the stock took a bit of a dive. Over the last week or so, it has showed some signs of recovery, flirting with the 76-to-77 level, only to succumb to both company-specific and macro pressure. I opened a position in LULU after earnings. Right now, I am sitting on unrealized losses.

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Some investors would call me crazy for not having a stop loss on the position. I do use stop losses, particularly on short-term trades based less on the long-term, but more on technicals and near-term up or downside catalysts. But I shy away from them on long-term conviction plays. I bought LULU because I believe it's a well-run company that will continue to grow at a rapid clip. CEO Christine Day has the factors brick-and-mortar retailers absolutely must have to not only remain relevant, but survive:
  • A high-quality exclusive brand not available anywhere else
  • An affluent, very specific target customer willing to pay a premium for quality and social status
  • The ability to control limited inventory by not discounting.
  • This quarter, Day finds herself with an unusually high level of inventory on her hands. Because Lululemon does not discount -- and the company has essentially trained customers to believe product is scarce -- this typical "problem" in retail should turn into higher revenue. When a dime-a-dozen company like Research in Motion (RIMM) gets stuck with product, it has no choice but to give it away and take a massive charge. Lululemon runs more like Apple (AAPL), who, operating from a position of strength, dictates the terms of engagement with the consumer.
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