Bargain Alert: Lululemon Shares Could Be About To Hit Rally Mode

It’s been a tough year for shares of Lululemon Athletica Inc. (NASDAQ: LULU); there’s no getting around it. While the rest of the equity market has been enjoying a broad and diverse rally back towards highs, the athleisure company has been struggling to gain any momentum since its bombshell earnings last quarter. 

As a sign of just how quickly the stock can rally when it wants to, we saw Lululemon shares gain more than 40% in the final 2 months of last year as a risk-on sentiment swept across the market. But perhaps a muted start in January, where the divergence from the rest of the market really started, was a sign of what was coming. 

Recent Decline for Lululemon 

Late March saw the company report its Q4 earnings, but a beat on both headline numbers was nowhere near enough to make up for the dire profit warnings from management. The fact that it was a similar situation for Nike Inc (NYSE: NKE), arguably their closest competitor, didn’t help when it came to the damage to the stock, and an immediate 20% drop has turned into a 30% since then. 

You know you’ve messed up when some analysts, like Randal Konik from Jefferies, ask if “Lululemon headed for the same fate as Under Armour?”. But that’s where we are today as we head into the back half of May, with the benchmark S&P 500 index notching a record high in Thursday’s session, making things worse for Lululemon investors. 

Getting Involved in Lululemon 

But there could be an interesting opening opportunity for those on the sidelines who have avoided getting caught in this year’s downturn. Having sunk almost 35% since its last December peak, and with the stock back trading at 2020 levels, the question has to be asked if the Lululemon selloff has become overdone. 

There are several reasons to think so. Consider, for starters, the stock’s relative strength index (RSI). Based on recent trading history, the RSI is a popular tool for getting a quick sense of how overbought or oversold a stock. With it currently reading 34, having been down below 20 last month, the stock is clearly verging on extremely oversold levels. 

Several analysts have also been screaming that the stock is still a solid Buy, with a huge upside potential that’s only getting bigger as the downturn continues. For example, Oppenheimer reiterated their Outperform rating on Lululemon shares last month and said it was still their top pick in the athleisure space. This was based on what they called the “underlying growth and expansion potential for the brand” and an increasingly attractive valuation, largely thanks to the stock’s drop. 

With a price-to-earnings (PE) ratio of just 27 right now, this is the most attractively valued, on that key metric at least, Lululemon has been since 2017. It’s a far cry from the PE of 80 the stock had in 2020 or even 50 towards the end of last year. 

Last month also saw an Outperform rating on the part of Robert Baird, who while trimming their price target still had it at an attractive $505. From the $338 that shares closed at on Thursday, that’s pointing to an upside of some 50% from current levels. 

Final Considerations

Beyond these two updates last month, the team at BTIG Research took a similar bullish stance last week. They initiated their coverage of Lululemon with a Buy rating and a $425 price target. While lower than Baird’s, this suggests an upside of 25%. 

Investors should expect shares to hold their ground around the $330 mark, where the bears ran out of steam last month. If Lululemon can consolidate there ahead of its Q2 earnings at the end of the month, things could get interesting quickly. 

Source MarketBeat