NEW YORK (TheStreet) -- In the field of financial services, you have to ask yourself "why" literally around the clock. Well, that is, if you want to be successful. "Why did the company's sales plummet?" "Why did gross margins come in ahead of Wall Street expectations?" "How did the company really beat on earnings, was it simply a function of gobbling up its stock on the public market?" Investors take notice: Asking yourself "why" is necessary when running through an analysis of a company that may be bought for your portfolio. Not asking "why" raises the prospect of being surprised negatively by an unforeseen development down the road.
As a rule of thumb, all investors should keep detailed notes on the reasons for buying a stock in the first place, and revisit them at the end of each week (notice I said investor, a trader should revisit his/her investment thesis hourly or minute by minute).
Lululemon (LULU - Get Report) offers a great example of why asking "why" is so critical. On Wednesday, I released this tweet following news that the founder of Lululemon, Chip Wilson, voted against two of the company's board members:
Brian Sozzi (@BrianSozzi) June 11, 2014
I thought this public announcement and rather blunt commentary by the founder a day ahead of earnings, which were to be delivered by a still relatively new CEO, was a major red flag. If the quarter had come in strong, I don't believe that statement (littered with clues that the quarter was soft, have to pay attention to actions words ... every Securities and Exchange Commission document from a company should be reviewed in the same manner as studying for the SATs: hyper-critically) would have been issued. Lululemon Thursday forecast a material second quarter and fiscal 2014 earnings warning. In addition, in looking through Lululemon's 10-Q filing, product margins declined 310 basis points year over year due to a prolonged mix shift to lower seasonal margin goods.
Here are the words from the founder's statement on Wednesday that raised red flags for this analyst:
"While I am excited about the new management team that I helped put in place, I am concerned that the Board is not aligned with the core values of product and innovation on which Lululemon was founded and on which the company thrived."
"I was hopeful that we would be able to create a balance at Lululemon between product and growth that would complement each other. Instead, I have found a palpable imbalance in Board representation, which is heavily weighted towards short-term results at the expense of product, culture and brand and longer-term corporate goals. I believe this is impacting the company's prospects. My vote today sends a signal to the financial community that the company must address this imbalance if Lululemon is to fully recover."