High Insider Selling and High Short Floats for Lululemon and UnderArmour
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About insider selling, Warren Buffett observed that, "It's almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors)."
That accurately describes the situation at both UnderArmour and Lululemon.
At UnderArmour, there have been well over thirty open market sales by insiders over the past year without a single open market buy. Over that time period, UnderArmour stock has risen by more than 50%. At present, there is now a short float of 8.10% for UnderArmour. A short float of 5% is considered to be troubling for a company.
For Lululemon Athletica, it is the same story: Over thirty open market sales for the last 52 weeks without a single open market buy. During that span, the share price has fallen by 2.51%. However, for 2012, Lululemon is up by 27.45%. The short float for Lululemon is toweringly high at 26.27%.
Also high for each stock is the price-to-earnings ratio. While the average price-to-earnings ratio for a member company of the Standard & Poor's 500 Index is around 14, Lululemon Athletic has a price-to-earnings ratio of 43.73. The price-to-earnings ratio for UnderArmour is 58.84.
In addition to high insider selling, high short floats and high price-to-earnings ratios, UnderArmour and Lululemon are in a highly competitive industry. Other companies in the sector include Nike (NYSE: NKE), Ralph Lauren (NYSE: RL) and Gap Inc (NYSE: GPS).
Nike is, by far, the dominant brand in the athletic sportswear sector. It has a price-to-earnings ratio of just 20.42. The short float is tiny at only 1.13%. The most recent insider transaction at Nike was a buy on July 5 by John Leichleiter, a director of the company.
Of the Polo sportswear fame, Ralph Lauren has a price-to-earnings ratio of 20.69. The short float is just 2.48%.
For Gap Inc, the price-to-earnings ratio is 13.79%. There is a short float of 5.14%.
To support such high price-to-earnings ratios, a high profit margin and a return-on-equity are needed for UnderArmour and Lululemon. This is lacking for UnderArmour, which only has a profit margin of 6.44% and a return-on-equity of only 16.49%. At Lululemon, the profit margin is 18.04% and the return-on-equity is 35.24% .
These are hardly more imposing than those for Nike, Ralph Lauren and Gap Inc. The profit margin at Nike is 9.21% with a return-on-equity of 21.98%. For Ralph Lauren, the profit margin is 9.93% and the retutn-on-equity is 19.58%. The profit margin is 5.54% for Gap Inc. with a return-on-equity of 24.54%.
The price-to-earnings-growth (PEG) ratios for UnderArmour and Lululemon are bearish. According to investing legend Peter Lynch, this is one of the most important ratios. A PEG of 1 is considered to be adequate: The lower the better. UnderArmour has a PEG of 2.63. The PEG for Lululemon is 1.54.
Powerful names in investing are gathering around short positions for Lululemon. According to one article, "...notable Australian short seller, John Hempton, told investors that he did not understand the reasoning behind Lululemon's rapidly rising share price and therefore making the stock a short candidate." In addition, "...iconic hedge fund manager, David Einhorn of Green Light Capital, has moved into a short position on Lululemon. Although Einhorn's fund has declined to comment on the matter, this is definitely a plus for the bears. Einhorn is famous for his short selling, particularly in Allied Capital, Lehman Brothers and Green Mountain Coffee Roasters."
Over the last month of trading, Lululemon is down by 6.87%. UnderArmour is still performing well, up 14.54% for the same period. UnderArmour is now at its year high. Insiders are selling and many are establishing short positions in the expectation that both UnderArmour and Lululemon will soon be falling, however.
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Lululemon Athletica and Under Armour. Motley Fool newsletter services recommend Lululemon Athletica, Nike, and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.