I see the possible benefits of long-term investment very clearly. Still, it is not always easy to think for the long term. Right now there look to be some great short-term opportunities fizzling in the market. So should I really be spending my time investing in a US stock that potentially has a long road ahead of it to persuade Wall Street that it deserves a higher valuation?
I think the answer is yes. After all, that is precisely what long-term investing is all about.
The US stock in question is yoga wear retailer Lululemon Athletica (NASDAQ: LULU).
I bought into the company following a September profit warning that had come hot on the heels of an earlier warning in June.
The price looks cheap. Is it?
The US stock market does not like nasty surprises, especially when they start to pile up.
So it is no surprise that the Lululemon stock price has crashed 56% so far this year. Ouch. Even for a yogi, that could be difficult to accept while maintaining calm breathing!
Now selling for 12 times earnings, Lululemon looks like a classic turnaround value stock.
For one thing, as earnings are set to fall, the valuation is less attractive than that current price-to-earnings (P/E) ratio of 12 may seem to suggest.
The prospective P/E ratio already looks much higher, even without factoring in any further potential disappointments from the apparel firm.
Terminal decline, or fixable missteps?
On top of that, turnarounds can be tricky.
Sometimes a company has made a few bad moves and can fix them. Lululemon reckons it has misjudged the length of fashion cycles. By clearing existing inventory and introducing new product lines faster, that sounds easily fixable.
But sometimes problems are more intractable.
Tariffs certainly have not helped Lululemon’s business. But it also faces risks in the form of newer competitors and a soft economy reducing some shoppers’ willingness to splash out on pricy gymwear.
Is Lululemon fixable? Or will it turn out to be a value trap? Only time will tell.
Here’s what I’m hoping
Still, I was happy to invest in September. If I have spare cash in November and think the Lululemon stock price is still attractive, I plan to buy more shares.
I think the company’s brand and loyal customer base is still a strong asset and can be the basis for a turnaround.
On top of that, I see the real opportunity for Lululemon in the coming decade as being international expansion.
While the company is wrestling with challenges in the US, it is doing a roaring trade overseas. I expect that to continue, as there is still a massive and largely untapped opportunity internationally for the brand.
