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Dare to bet against Lululemon? Add to ...

Uh-oh, Bronte Capital’s John Hempton has taken an interest in Lululemon Athletica Inc. , the high-end yoga apparel company. Mr. Hempton writes an excellent investing blog, where he often outlines his reasons for short-selling a particular stock – often, Chinese-based companies with perplexing financial records.

Lululemon certainly doesn’t fall into that category, but it does have a perplexing valuation: After surging 84 per cent over the past 12 months, the stock now trades at an astounding 51-times estimated earnings, a lofty valuation that implies outstanding earnings growth ahead. However, Mr. Hempton prefers to look at the company’s price-to-sales ratio, which is 10.

“That is amazing for a fashion company,” he said. He holds up Nike Inc. as a comparison, where the price-to-sales ratio is just over 2. “And Nike is not a thin margin business,” he said. “No other clothing company comes close.”

And if you’re willing to compare Lululemon to a technology stock, he points out that Apple Inc.’s price-to-sales ratio never rose above 7 and it is currently just over 3.

So is Mr. Hempton willing to short – or bet against – Lululemon, based on its valuation? He’s merely thinking things through at this point, raising several questions, including: Can you explain the stock price in any terms other than a play on female vanity? And, what if anything keeps the competition out of yoga clothes?

“Shorting female vanity is not something I have ever done successfully,” he said. And besides, if the stock is overpriced now, it was overpriced 50 per cent ago, too.

Other investors seem to be thinking along the same lines. According to Nasdaq, the stock has a short interest ratio – that is, the number of shares sold short divided by the stock’s average daily trading volume – of just 2.5 per cent, as of the middle of January. That compares to an average short interest ratio of 5.4 for other stocks in the Nasdaq, suggesting that betting against Lululemon is not exactly a popular bet right now.

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