Lululemon Stock Has Stretched Too Far

Before Lululemon shares can head higher, the chart suggests a substantial pullback is coming.
By Richard Saintvilus ,

Purely from a valuation perspective, shares Lululemon Athletica (LULU) - Get Report have stretched as far as they go, at least in the near term.

The long-term trend is still intact. But before Lululemon shares can head higher, the chart suggests a 5% pullback to around $73 is possible. So why ride the decline down?

Take a look at the chart below, courtesy of TradingView.

If you've been following my trades, you'll know that on March 29, I recommended taking profits in Lululemon shares, just before the shares plunged 11% in the five trading days that followed after the company's first-quarter earnings-per-share guidance missed consensus estimates.

Three months later, I recommended buying the stock on June 7 at around $68 per share. Lululemon closed on Thursday at $76.55, or 11% higher.

But you can see from the chart that the stock has met heavy resistance near $78 (the red line). Since reaching its 52-week high at $78.40 on Monday, Lululemon has given up 2.4%.

Valuation is now something to worry about.

The stock's recent gains, including a 46% rise year to date, have pushed Lululemon's forward price-to-earnings ratio to 36 -- three points higher since my recommendation. The P/E is now more than twice that of the average stock in the S&P 500 (SPX) , at a P/E of 17.

In other words, the stock is priced for not only strong growth, but perfect execution. And that's a lot to ask for, especially with competition from the likes of Nike (NKE) - Get Report and Under Armour (UA) - Get Report .

From a technical perspective, Lululemon stock shows a reversal toward the 20-day average at $74.66 (the blue line), and also toward support at around $73 -- a 4.6% decline.

That's not a huge fall. But there's also the risk of being trapped in a tight range. Lululemon pays no dividend, so it makes more sense to play the swings, rather than risk being trapped.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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