Word to the wise: tread carefully
Growth stocks such as Lululemon and Under Armour often command lofty valuations. Unfortunately for investors, stocks with exorbitantly high P/E ratios can see big swings in share price when the unexpected occurs.
That’s exactly what happened to Lululemon, and there’s nothing preventing more volatility in the future. Even after the 17% drop, Lululemon trades for 36 times trailing earnings according to Yahoo Finance. Under Armour, meanwhile, is equally priced for perfection, exchanging hands for more than 50 times trailing EPS.
For investors who are willing to take the risk, Lululemon and Under Armour are both growing sales and profits at very high rates. Value investors who are more interested in meaningful margins of safety likely will find more to like from Nike, which is also growing yet trades for a more reasonable 24 times earnings. In addition, Nike pays a 1.3% dividend, providing another layer of downside protection. As a result, I’d recommend investors prefer Nike among this group.
The article What’s Going on With Lululemon? originally appeared on Fool.com and is written by Robert Ciura.
Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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