Lululemon Stock Is Worth Owning. How to Play It With Options. – Barron’s

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In a world obsessed with healthy living, Lululemon Athletica is in a class all of its ownand its recent earnings disappointment doesnt change that. With the stock still near a 52-week high, the best way to play it could be with options.

The companys exercise clothes seem to make people look physically better than they really are, and anyone who is already in shape seems to be even fitter if they are wearing Lululemon (ticker: LULU).

Looking good is not cheap, but Lululemons customers are often insensitive to price because of how they feel when they wear the clothes. Plus, they tend to have money to begin with.

And therein lies the magic that helps explain Lululemon stocks extraordinary performance. Shares are up some 100% this year, and while the all-important holiday shopping period will be over at months end, investor enthusiasm for Lululemon seemingly knows no limits.

This is somewhat extraordinary since the stock markets perpetually high level has many investors worried about what tomorrow may bring. Famed investor Warren Buffett has amassed an extraordinary cash position of about $128 billion because he is reportedly struggling to find investment opportunities.

Analysts, however, are increasingly bullish on Lululemons prospects, even after the stocks meteoric year. Rather than advising clients to take profits because doubling money in less than a year is rare, analysts are telling investors that 2020 should also be a good year for Lululemon. MKM Partners recently increased the stocks target rating to $255 from $218. Oppenheimer raised the target price to $260, and told clients that 2020 could be a good year, too.

Investors appear to feel the same way. They were unfazed earlier in the week on news that Stuart Haselden, the companys respected chief operating officer, resigned to become chief executive of Away, a start-up luggage company. Plus, the stock has support on the Street.

The one hitch: Lululemon reported third-quarter earnings after the close on Wednesday. The results were good, but investors wanted more so they could feel good about owning a stock that has performed so well this year. The stock fell 3.7% on Thursday.

The numbers tell only part of the story, however, and they miss what is arguably the most valuable part of Lululemon: the community that has developed around Lululemons products. What began as a maker of high-end yoga apparel has morphed into an athletic-lifestyle company.

Lululemon leggings are worn in the way older generations might have worn Chanel, or a handsome suit from Paul Stuart. The comparisons might seem dramatic, but Lululemon has become a prestige brand. The apparel is often more expensive than most of the goods made by Nike (NKE), Under Armour (UA), and other competitors. Leggings cost about $100. The same for tops. Jackets cost about $200.

The setup creates some interesting opportunities to sell cash-secured puts to trade the stock and reshape the risk at a time when it is difficult to feel entirely at ease buying a stock that is trading near a 52-week high.

With the stock around $222, investors can sell Lululemons January $210 put for about $4.

Should the stock be above the strike price at expiration, investors can keep the put premium. If the stock is below the strike price at expiration, investors must buy the stock, or cover the put. The key risk is that the stock falls far below the put strike price, obligating investors to pay top dollar to buy either the stock or put.

At least for now, with the company appearing to execute on all cylinders, the risk of a sharp Lululemon stock decline seems worth taking. Even if you would not be caught dead in tight-fitting leggings and tops, and the idea of contorting yourself into a yoga pose seems laughable, you can use the power of finance to express your inner namaste.

Email: editors@barrons.com

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Lululemon Stock Is Worth Owning. How to Play It With Options. - Barron's

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