6/13/14 Picks

Long LULU ($37.4)

• LULU, the athletic apparel retailer, has been beaten down over the past year 44% due to product recalls, reduced financial projections, and management turmoil. 
• They missed earnings yesterday and fell 16% due to lowered guidance. Part of the miss was attributable to the repatriation of offshore profits, which will be used to buy back $450 million worth of shares.
• LULU has finally bottomed out and should bounce back. Their product is widely regarded as the highest quality activewear and they maintain a very loyal customer base. As much as I hate retailers in the current environment, this opportunity is an exception. Yesterday's decline provides a great entry point. 
• Valuation: LULU's P/E ratio has dropped below 20. This compares to Under Armour's 75 (with a similar growth rate) and Nike's 25. It is simply too cheap given its current growth rate. PEG ratio: LULU 1.26, UA 2.58, NKE 2.05.
• Profitability: Operating Margin: LULU 26%, UA 11%, NKE 14%. EBITDA Margin: LULU 29%, UA 13%, NKE 15%. 
• LULU is more profitable than its competitors and is still growing top and bottom line at an amazing rate. 
• Hopefully they have their issues behind them and will begin reverting back to a price range that reflects their profitability and growth prospects. 

Update from Tuesday regarding returns. We are now up in 9 of 10 positions with a 40 day return of 9.6% (unleveraged, equal weight, half long - half short). If you got involved with last week's OUTR July put, it is up 100% since Friday (not included below).