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Why Lululemon Stock Popped Today

Motley Fool - Mon Oct 16, 2023

Shares of Lululemon Athletica (NASDAQ: LULU) were stretching to 52-week highs today after the athleisure company was tapped to join the S&P 500, replacing Activision Blizzard after Microsoft's takeover of the video game publisher was approved.

As of 2:37 p.m. ET, the stock was up 10.4% on the news.

Why Lululemon is getting some S&P love

In a press release on Friday, S&P Dow Jones Indices announced that Lululemon will replace Activision Blizzard on its best-known index, the S&P 500.

The news gave Lululemon a boost for a number of reasons. Primarily, the gains came because exchange-traded funds (ETFs) that track the broad-market index have to buy the stock, which naturally boosts the price as demand exceeds supply.

Trading volume of Lululemon shares was unusually high. Nearly 9 million shares had changed hands before 3 p.m., compared to the three-month average daily volume of just 1.25 million shares.

The other reason the stock rose is that inclusion into the marquee large-cap index acts as a stamp of approval for the business and the stock. While there are some baseline criteria for being part of the index, inclusion is determined by a committee and there's no clear reason why Lululemon, or any other stock, gets added to the index.

Can Lululemon stock keep moving higher?

Lululemon has been a longtime winner on the stock market, but shares look even pricier following today's jump. The apparel stock now trades at a price-to-earnings ratio of 53.

Even in a difficult environment, the company has continued to deliver strong growth with revenue up 18% and constant-currency comparable sales up 13% in its most recent quarter. However, continued pressure on consumer spending could eventually catch up with Lululemon.

Its current valuation demands continued growth. Considering the broader macro environment, investors may want to be cautious at the current price point, at least until the economy is on safer ground.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica and Microsoft. The Motley Fool has a disclosure policy.

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