Many investors believe that stocks become cheap once they drop 50% from their peak. The problem is that a 50% off stock market sale does not mean that a company is cheap against the market or against peers. This is the case for Lululemon Athletica Inc. (NASDAQ: LULU) again as the stock rose to start off the week.
The driver that has taken shares up another 3% is yet more hope that reports will lead to a buyout of the company. While anything is possible in the world of mergers and acquisitions, Sterne Agee’s Sam Poser and Ben Shamsian have again tempered some of the excitement around the stock.
Sterne Agee’s analysts believe that Monday’s volatility is due to the Wall Street Journal article from Sunday pointing out that Lululemon’s founder Chip Wilson was working with bankers at Goldman Sachs to review his options. The reason is that he has not been pleased with the direction the board of directors has taken. The reality is that shareholders should be even more unhappy because they have taken on large losses of late.
The Wall Street Journal take was that Wilson may launch a proxy fight to win additional board seats, or that he may try to partner with a private equity firm in a buyout. Of course, the speculative article also says that no decisions have been made. Elsewhere, most analysts have dropped support of the company.
Monday’s Sterne Agee report said:
We continue to rate Lululemon a Neutral for the following reasons: If the reports are accurate, a strategic acquisition by a large apparel company is unlikely. Given the domestic and international growth objectives and fixed cost structure, the free cash flow is not large enough to allow for significant balance sheet leverage by private equity. Based on his comments from last November which we contend damaged the Lululemon brand, we believe potential partners may be warded off by Mr. Wilson’s volatility. We do not believe that Mr. Wilson will detach himself from Lululemon, which leaves us on the sidelines.
Lululemon shares were up again by more than 3% to $41.70 in mid-day trading on Monday. Its 52-week range is $36.26 to $77.75, but we would point out that the 52-week low was as recently as June 13.
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