A gain of 41.13% in 2019 for shares of Lululemon Athletica Inc. (LULU) likely couldn’t have happened without institutional support for the shares. The way the shares have traded tells a story of a stock gaining alongside a large amount of unusual trading activity. It’s bullish activity because the shares are heading higher on increasing volumes, indicating that a buyer is involved.
Over time, we’ve learned how stocks with a history or strong fundamentals tend to rise in price. Smart money managers are always looking to bet on the next outlier stocks … the best in class. I actually wrote about Lululemon in May of last year, when I was noticing the same activity. You can read that article here. The shares are up 61.64% since that post.
The main criteria we look for when betting on upside is a history of strong fundamentals, strong technicals, and big potential buying in the shares. I’ll go into the fundamental picture later, but the true tell on the near-term trajectory of a stock lies in the trading activity of the shares.
Simply put, it’s all about supply and demand. When demand is higher than supply, the stock rises. When demand is lower than supply, stocks fall. For most of 2019, Lululemon stock has been in an uptrend accompanied by unusual buy signals. It’s all about stacking the odds in your favor.
For Mapsignals, when we look for an entry on a leading stock, we want to see an increase of potential buying. Just to show you graphically what our unusual trading activity signal looks like, have a look at all of the unusual institutional (UI) signals Lululemon stock has made the over the past year.
Beginning this year, there have been days when the shares appear to have had a buyer. This is notable because stocks move based on supply and demand. What is really catching our eye now is the recent UI buying. After the meltdown late last year, the stocks has been in bull mode:
In 2019, Lululemon stock has logged five unusually high-volume days, indicative of buying in the shares starting on Jan. 18, 2019 (see chart above). This points to Lululemon gaining in an unusual way, which suggests that demand for the stock is increasing.
If you are going to make a bet on the direction of a stock, it is prudent to pay attention to how the shares are trading. Just like you don’t want to fight the trend, you also don’t want to fight a stock that shows increasing price alongside an increase in the volume traded. Someone could potentially be accumulating a position.
Mapsignals’ goal is to identify tomorrow’s top stocks today. We’re basically looking for outlier companies with healthy fundamentals accompanied by outsized unusual institutional trading activity. By studying these data points, we can make an educated guess as to which equities institutions are trafficking in and marry this information with fundamentally sound companies. We want the odds on our side when looking for the highest-quality stocks.
When we decide on a strong candidate, we consider prior leaders that have a history of technical outperformance. When they show leadership, we see these as opportunities. Below are a few areas in which Lululemon stock has grabbed our attention year to date (YTD):
- YTD outperformance vs. market: +25.03% vs. SPDR S&P 500 ETF (SPY)
- YTD outperformance vs. discretionary sector: +22.35% vs. Consumer Discretionary Select Sector SPDR Fund (XLY)
- Recent bullish unusual trading signals
Now, we take it a step further and score the best stocks showing unusual trading activity. Below you can see the historical times since 2017 when Lululemon made the top 20 report for Mapsignals. These are the highest-rated signals in our stock universe. Clearly, we caught the big run-up beginning in 2018. That’s exactly what our process is designed to do. We’d even venture to call this stock an outlier:
On top of a technical picture that is strong, one should also look under the hood to see if the fundamental picture supports a long-term investment. Lululemon has been firing on all cylindars … just look at the following highlights from its recent earnings report:
- Q1 2019 YoY revenue growth rate: +20%
- Q1 2019 YoY gross profit growth rate: +22%
Lululemon is breaking out recently alongside other athletic stocks. We believe that the current level for the shares is in position for further upside. The narrative for Lululemon and other discretionary names is one of strong growth. We are always on the lookout for great companies showing usual trading activity in the shares. The best companies tend to trend higher over the long run. All of this points to a long-term opportunity for the stock.
The Bottom Line
Lululemon stock represents a potential buying opportunity for the long-term investor. Given the lift in price, growing fundamentals, and recent unusual buying signals, this stock could be worth a spot in a growth-oriented portfolio.
Disclosure: The author holds a long position in Lululemon shares at the time of publication.