How to Avoid the Next Lululemon

Shares of Lululemon (LULU) plunged after the athletic apparel company shocked Wall Street with last night’s earnings report, particularly its weak outlook. For FY 2017, Lululemon expects to earn between $2.26 and $2.36 per share on between $2.55 billion and $2.60 billion in revenue. This is well below the Street view of $2.57 EPS on $2.62 billion in revenue.

In the first quarter, Lululemon actually expects that same-store sales will decline. This shocked the analyst community, because they were forecasting 5.1% same-store sales growth. Apparently Lululemon is struggling to grow its e-commerce sales due to weak digital merchandising and a bland product assortment.

So analysts will be forced to slash their Q1 and full-year 2017 expectations in the coming days. And to add insult to injury, Lululemon missed profit forecasts for the fourth quarter. Investors clearly didn’t appreciate these poor results, so LULU shares are down over 20% as I write this.

No one likes to see one of their stocks lose over a fifth of its value. But the good news is that there is something you can do to protect yourself from unexpected volatility. Simply, before any of your stocks reports earnings, run it through Portfolio Grader. When it comes to stock analysis or portfolio analysis, Portfolio Grader is an incredibly powerful tool for individual investors. You can read all about Portfolio Grader here, but here’s how it works in a nutshell:

There are two critical characteristics at the center of my stock analysis. The first is strong fundamentals. By fundamentals, I mean sales growth, earnings growth and the like. Growing companies are companies that are healthy and thriving. They have smart leaders who know how to run and manage a smart business. If a company is struggling to sell its products or is spending more than it makes, it’s not a company that you want to own for growth.

The second characteristic I look for in any great stock is strong buying pressure. Think of this as "following the money." The more money that floods into a stock, the more momentum a stock has to rise. And there’s no doubt about it, we all like stocks that rise!

So when you plug LULU into Portfolio Grader, you’ll notice that the stock fails with a D-rating, which makes it an automatic sell. That’s due to a combination of nonexistant buying pressure (F Quantitative Grade) and lackluster fundamentals (B Fundamental Grade). Once the latest data have been entered into Portfolio Grader, I expect that its Fundamental Grade will fall further.

The bottom line is that running LULU through Portfolio Grader a few days ago could have saved shareholders a lot of heartburn. The flipside of this is that savvy investors can also use Portfolio Grader to research potential buying opportunities this earnings season. For example, you can click here to few the top-rated Specialty Retail stocks in Portfolio Grader right now.

Sincerely,

Louis Navellier

Louis Navellier

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