A gain of 33.53% in 2018 for shares of Lululemon Athletica Inc. (LULU) likely couldn’t have happened without strong institutional support. LULU’s shares have been performing very well this year alongside other apparel names, with Nike, Inc. (NKE) up 14.03% year to date (YTD) and Under Armour, Inc. (UA) up 31.64% YTD. In our opinion, this performance supports a bullish undertone for the sector and thus for Lululemon stock.
Taking a look at how Lululemon shares have been trading over the past year, the gains seen by the stock have shown share prices increasing alongside volume increases. With activity like that, it should come as no surprise that the stock has trended higher over that period. With athleisure growing in popularity, Lululemon is a key beneficiary of that growth. Moreover, one of the biggest factors used to identify strong stocks for the long term is to look simply at supply and demand – and Lululemon stock has clearly been in demand. Betting on growing stocks with great fundamentals and increasing institutional activity can be a great recipe for long-term shareholders. (See also: Apparel Rivals Fight for Piece of Athleisure Space.)
In the view of Macro Analytics for Professionals (MAP), the strongest indicator of positive price momentum is obtained by measuring potential institutional accumulation. In 2018, Lululemon stock has logged 11 of these rare signals, with the first bullish signal of the year on Jan. 2. We want to see bullish activity in the shares alongside solid fundamentals, as this indicates that demand for the stock should increase.
In the chart below, Lululemon price gains this year are accompanied by increasing accumulation, and shares of the retailer are trading at 52-week highs:
Courtesy of TradingView[Learn more about using supplemental technical indicators to analyze stock charts in Chapter 4 of the Technical Analysis course on the Investopedia Academy]
MAP’s process focuses on identifying companies with healthy fundamentals accompanied by outsized, unusual institutional activity to try and measure potential accumulation/distribution at the single-stock level. By studying these data points, we can hypothesize which equities institutions are trafficking in and marry this information with fundamentally sound companies. We want the odds on our side when looking for the highest-quality stocks.
When deciding on the strongest candidate for long-term growth, we consider many technical areas important to success. A few of these for Lululemon are as follows:
- YTD outperformance vs. market: +31.62% vs. SPDR S&P 500 ETF (SPY)
- YTD outperformance vs. sector: +27.45% vs. Consumer Discretionary SPDR ETF (XLY)
- Bullish potential accumulation signals
On top of a great technical picture, one should also look under the hood to see if the fundamental picture supports a long-term investment. As you can see, Lululemon has solid earnings and sales growth rates:
- One-year sales growth rate: +13%
- Three-year sales growth rate: +13.81%
- One year EPS growth rate: +14%
Lululemon checks the box on strong technicals and fundamentals while recently showing bullish institutional momentum. We believe that the recent strong price performance of other apparel stocks supports the narrative for a potential long-term position. Lululemon shares have been powering higher for the past year, and with multiple unusual institutional activity signals, it could be setting up for an additional move to the upside. All of this points to further long-term bullish action for the stock.
The Bottom Line
Lululemon represents a potential buying opportunity for the long-term investor. Given the recent breakout to new 52-week highs, solid earnings growth, bullish sector action and multiple recent bullish institutional accumulation signals, this stock could be worth a spot in a growth portfolio. (For additional reading, check out: Lululemon Breaks Out to Fresh Highs, but Are Shares Oversold?)
To learn more about MAP’s institutional signals please visit our “About Us” page.
Disclosure: The author holds a long position in Lululemon, Nike and Under Armour shares at the time of publication.