1 Growth stocks almost 40% off to buy now

Share prices of a sportswear company Lululemon Athletic (NASDAQ: LULU) are down about 40% from their peak in December 2023. Given the company’s strong performance, especially since 2020, is this stock ready for a sell-off?

When the Covid-19 pandemic hit, Lululemon benefited from increased consumer spending on a range of goods. This increased spending resulted from a combination of stimulus checks and the limited opportunities consumers would otherwise have to spend on experiences. At one point, Lululemon’s quarterly revenues were growing as much as 80% year over year.

The impact of those stimulus funds has since waned, with consumers pulling back on some of their discretionary spending last year to address some inequalities in the overall economy. As a result, the company’s growth rate and share price have weakened as the company struggles to overcome difficult comparisons and the market responds.

The market doesn’t seem to take into account that Lululemon’s success wasn’t a blip caused by the pandemic. It is a world-class company and consumer brand with a bright future. So instead of giving up on Lululemon, investors should consider doubling down on it.

An excellent business with an impressive track record

Lululemon operates in a cutthroat competitive industry. I’m talking about consumer retail. The company specializes in the athletic category, selling leggings, yoga pants and other exercise clothing. He opposed such steadfast clothing lovers Nikea great company in itself.

It separated part of the retail space, building a lifestyle brand that appeals to young, active consumers. And Lululemon has grown profitably like clockwork over the past two decades.

LULU Revenue Chart (TTM).

The stock was a huge success, returning over 2,000% in that time. So let’s reiterate: Lululemon was great pre-pandemic, even if conditions during the pandemic (which are officially still ongoing) provided a temporary boost to its sales. But now it’s about looking to the future.

Lulemon has solid growth prospects

Why is the share price falling? Simply put, its growth rate has slowed over the past two years. Below you can see that Lululemon’s sales have grown at an average rate of 25% per year for the past five years. Sales growth spiked to over 80% at one point, and in the most recent quarter, the company saw just 10% year-over-year growth.

LULU revenue chart (year-on-year quarterly growth).

A few things can be true and they don’t necessarily spell trouble for Lululemon. Economic growth has slowed in the wake of the pandemic-driven surge, which is understandable. Lululemon is no longer a young startup, so it seems reasonable that such a surge in growth will stimulate some demand and eventually see a decline in growth.

Additionally, while inflation is well below its 2022 peak, it is still above the 2% target rate and consumers continue to feel some financial pressure from recent price increases. America’s personal savings rate is at its lowest level in almost a decade, and people are less able to make discretionary purchases. You can love a product and I believe people love Lululemon. However, discretionary items are usually the first purchases when times get tough.

The hope is that U.S. consumption will rebound over time. The economy is cyclical, and there’s a good chance that people will eventually have more money to put back into discretionary spending. Acknowledging Lululemon’s current struggles without throwing the stock into the abyss is fine.

The stock is too cheap given Lululemon’s fundamentals

Understandably, the slowdown in revenue growth has caused analysts to lower their expectations for the company. Lululemon’s projected earnings growth rate of 12.5% ​​is by far the lowest in years. Hence the significant drop in the value of shares from their peaks.

However, it is possible (and seemingly likely) that the market overreacted and lowered share prices too much. Lululemon stock is currently trading at a forward P/E ratio of 22. Its price-to-earnings-to-growth ratio is 1.7, which signals that the stock isn’t necessarily a bargain but is a smart buy given its projected growth. Expectations are changing, however, and Lululemon’s growth rates will likely change more as we move away from the pandemic and consumer discretionary spending eventually recovers.

Such a scenario could cause estimates (and sentiment) to rise again, making the stock look cheaper in hindsight than it currently is.

LULU PE Ratio Chart (Forward).

This is, of course, a theory and there is no guarantee that this will happen. However, long-term investing requires looking at the stock and the company’s situation, looking into the future and guessing what might happen. Lululemon is a proven superstar brand with years of strong growth behind it. There are reasonable chances that the company will eventually regain its good fortune and its shares will rise again.

Is it worth investing $1,000 in Lululemon Athletica right now?

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Justin Pope has no position in any of the companies mentioned. The Motley Fool covers and recommends Lululemon Athletica and Nike. The Motley Fool recommends the following options: Long January 2025 $47.50 Nike Call. The Motley Fool has a disclosure policy.

1 Growth Stock Down Nearly 40% To Buy Now Originally published by The Motley Fool