This week marks two full decades since I began my career as a business reporter, although it's just been in the past few years that I've been making specific "buy" and "sell" calls on stocks. When I give presentations to other business journalists about making that transition, there are a couple of companies I cite when discussing the perils of prognostication. One of them is Lululemon Athletica Inc., which taught me the hazards of avoiding stocks that are "priced for perfection," then watching them stay perfect, and rocket further upward, for several more years.
Now, though, Lululemon is an example of being wrong by being right too early. Or, if you prefer, an example of waiting long enough to be able to declare victory. I refer specifically to a December, 2011, column that passed on Lululemon in favour of a decidedly out-of-favour Gildan Activewear Inc. For more than a year, that column was only half right. No more.
Before I take that victory lap, however, let me illustrate how timing is everything. In December, 2010, when Lululemon shares were at a split-adjusted $27.47 (U.S.), I wrote an article for Globe Investor that urged caution, saying "the biggest hazard in the near term is simply the enormous expectations that now surround the company." Lululemon continued to meet and beat the expectations for nearly two and a half years, and anyone who avoided the shares on my advice missed out on their tripling. Anyone who bought instead is still up more than 50 per cent, even with Lululemon's recent troubles.
Ah, the troubles. This is what I'd like to highlight, as would the editor who assured me, in the face of the rising Lululemon, "one day you'll be proven right." You are likely familiar with them. Decelerating or declining sales, inventory problems, too-sheer pants, founder Chip Wilson's unfortunate comments about ill-shaped customers.
All together, it's way too much bad news for a hot growth stock. And, shall we say, Lululemon is now priced for imperfection, instead. At $41.12, it's now below the level of December, 2011, when I said investors with a time horizon of more than a year "may look back and wish they'd taken a chance on Gildan rather than buying in to the Lululemon story."
Ah, Gildan. At the time, it lacked the air of drama we currently see at Lululemon, but its performance was even more lacklustre. The chief problem was wildly volatile cotton prices, which crushed Gildan's margins in 2011's fourth quarter and resulted in a deeply disappointing earnings forecast for 2012.
Well, 18 months later, no one regretted Lululemon, because it was up 82 per cent. But Gildan's U.S. stock had risen 124 per cent. And now, a year later, Lululemon has been cut in half from its June, 2013, high, but Gildan has tacked on another 40 per cent, for a full tripling since that column. (Sometimes I buy the stocks I recommend. Sometimes, I do not. I did not buy Gildan. This makes me sad.)
All well and good, but what do I do now, you may ask? Analysts are embracing Gildan, with an average target price just above $70 (Canadian). Last week's acquisition of hosiery maker Doris Inc., a fellow Montreal concern, is seen by many as another in a long line of value-adding deals for Gildan.
It's also worth noting that, despite the shares' rapid ascent, their price-to-earnings ratio of 17 still makes them cheaper than Lululemon's (a forward P/E of 23, per Standard & Poor's Capital IQ). Lululemon, despite all its troubles, is more expensive than J. Crew Group Inc. and Adidas AG and is comparable to Nike Inc.
The prediction this time around, then, is a continued bet on Gildan, rather than Lululemon, although the outperformance may not be quite as dramatic as before. And that I'll also revise that presentation that calls Lululemon one of my worst-ever calls. At least for now.
David Milstead