Tuesday’s Top Upgrades (and Downgrades): American Apparel Inc. (APP) and More

Unlike American Apparel, of course, Lululemon is already a profitable operation. It’s also debt-free, and free-cash-flow positive. Just like American Apparel, though, Lululemon is overpriced. The $16.7 million in free cash flow it generated this past year is less than $0.30 on the dollar, compared to the $57.3 million it reported earning during the same period. But even if Lululemon’s FCF backed up its reported income 100%, the stock would still look a bit pricey at 41 times earnings.

Long story short: Right now, investors are willing to forgive Lululemon’s sins of valuation… as long as it lives up to expectations of near 28% annualized earnings growth. If that growth momentum should stumble, however, they’ll quickly abandon the stock — like a downward-facing dog, with fleas.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends lululemon athletica.

The article Tuesday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.

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