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Will Chip Wilson Take Over Lululemon or 'Just' Lead It to Dominance?

NEW YORK (TheStreet) -- When I profiled sportswear maker Lululemon (LULU) earlier this month in "Lululemon Is Oversold and a Value Buy Ahead of Earnings," I focused on the value the shares offered and the potential for a massive short squeeze. Lululemon's founder and board member Dennis "Chip" Wilson appears to agree, and reportedly is working with investment bank Goldman Sachs (GS) to increase his exposure and control over the company.

Lululemon managed to beat estimates by 2 cents and reported 34 cents per share. As of noon Monday, shares were trading at $41.66, up well over 3% for the day.

But is Lululemon's performance enough to satisfy shareholders?

Investors zeroed in on the margin compression and inventory levels. Wall Street is known for its incredibly short amount of patience, and if you're not careful, you may find yourself selling at the worst possible time.

In the short-term, emotion -- not logic -- is what drives a stock price higher or lower. Fear of continued losses and a natural tendency for shareholders to take profits too soon (or exit at breakeven) can send shares well below their true underlying value. The same happens when stocks are inside a bull trend, although for different reasons.

In other words, once a stock is in a bear trend, it almost always overshoots to the downside and overshoots within a bull trend. It was ridiculous that Lululemon's shares opened below $38 on June 12. We know this because once the dust settled and emotion somewhat abated, the shares quickly rebounded, increasing almost every day since.

Lululemon isn't an isolated example. I see the same market dynamics happening to many other great stocks. Almost exactly a year ago, Apple (AAPL) was trading under $60 (adjusted for split) and the news was filled with worry that Apple's story was over. I wrote several pieces explaining why investors should buy on others' fear, including "Apple Is a Gift You Won't Want To Re-Gift."

The first half of 2013 was brutal for Apple shareholders. Short interest steadily increased, and pundits were busy tripping over each other to explain why the stock will never recover. After nine months of weakness, Carl Icahn woke up the market to the fact that Apple is here to stay, and its strong balance sheet and product sales meant continued profits.

It's almost funny how one person can change the entire stock market's perception when the financial numbers were right there in front of everyone the whole time.

Fast forward to 2014, and instead of Apple's shares falling for nine months we have Lululemon's shares falling.

Lululemon also has a strong balance sheet and is growing. The company is essentially debt-free and is growing its store count. After a relatively slight product issue, the company continues to beat analyst estimations. In fact, the company beat estimates every quarter for the last three years.

And instead of Carl Icahn showing the way for Apple, Lululemon has Wilson working with Goldman Sachs.

Who is in a better position than Wilson to know if Lululemon is oversold or not? Probably no one. According to Yahoo! Finance, he hasn't sold a share of his holdings in over a year. Now he's reportedly seeking a strategy to buy more shares, including a possible takeover.

If Wilson sold while the shares declined, it would paint a significantly different picture, but he hasn't and I think investors that sit on their hands and wait it out (or add during weakness) will be glad they did.

Calpine Sees Risk to Geothermal as Green Energy Grows

Time for Nike and Under Armour to Pay College Athletes

Lululemon, eBay and Staples: 3 Retailers United Under a Red Flag

Smith & Wesson and Coach: High Hopes and Low Expectatations

At the time of publication, Weinstein had no positions in securities mentioned.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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