It says something about the exuberant state of the stock market that two rather shopworn icons of Canadian businesses have both rewarded investors with double-digit gains over the past year.
Neither lofty valuations nor obvious business challenges have been able to dim the outburst of enthusiasm around BlackBerry Ltd. and Lululemon Athletica Inc. Well, until this week at least.
Both companies report results over the next few days – Lululemon on Thursday, BlackBerry on Friday – and investors will be watching for signs that the market's recent bullishness regarding both businesses remains justified.
At Lululemon, shares have become a luxury item, changing hands at a premium price of more than 35 times earnings despite growing competition for the brand and fears of market saturation.
At BlackBerry, profits are minimal and revenues are shrinking, but diehards remain convinced the company will find rewarding new ways to cash in on its technology.
Both companies have outpaced the S&P/TSX composite over the past 12 months. Lululemon shares have advanced nearly 51 per cent in Canadian dollar terms, while BlackBerry has gained nearly 13 per cent.
Despite the impressive returns, the companies couldn't be more different.
Lululemon was among the first to recognize the potential in yoga wear and now faces an onslaught of competition from rivals who also want to cash in on shoppers' passion for looking good while breathing deep.
BlackBerry, in contrast, is merely looking to reconnect. It pioneered the market in smartphones but its early lead has long since been obliterated by the Apple and Android products that now dominate the sector.
To put this another way, Lululemon faces the challenge of defending its vast turf, while BlackBerry confronts the task of trying to win back just a skinny slice of territory.
Opinions on both companies are fiercely divided. For instance, 18 analysts rank Lululemon as a "buy" while 17 call it a "hold" and four say it's a "sell."
Goldman Sachs, one of the critics, downgraded Lululemon to "sell" earlier this month, saying the company "is a great brand in a compelling category, but that the stock reflects unrealistic growth assumptions for the medium term."
Goldman says Lululemon's ambition is colliding with three Cs: competition, Canada and currency.
The competition comes from rivals such as Nike and Under Armor, while the problem with Canada is that it's a saturated market with little room for further expansion.
The currency issue is the downward-facing loonie. Since Canada accounts for roughly a quarter of Lululemon's sales, the declining exchange rate pulls down Lululemon's results, which are reported in U.S. dollar terms.
The three Cs will smack Lululemon's share price over the next six months, Goldman predicts. The investment bank forecasts a slide from the current level of around $65 (U.S.) a share, down to $52.
At least Goldman dispenses its negativity evenly. It also downgraded BlackBerry earlier this month, saying that the company has yet to prove it can actually boost revenue rather than just cut costs.
Other analysts concur. Only five label the company a "buy" while 20 call it a "hold" and 11 recommend "sell."
The crux of the anti-BlackBerry case is that the stock has risen more than 60 per cent since chief executive John Chen was appointed in November, 2013, but that the share-price gains have yet to be backed by evidence of a genuine turnaround in the business. Revenue has plunged from $19.9-billion in 2011 to an estimated $3.5-billion in 2015, while profitability has vanished.
The company has introduced a spate of new hardware devices over the past year, ranging from a high-security tablet to a "classic" smartphone that aims to appeal to consumers' lingering fondness for BlackBerry's physical keyboard. However, the Goldman analysts label any surge in hardware revenue as "empty calories" since they believe the devices aren't profitable.
They say BlackBerry's turnaround hinges on its ability to grow its Enterprise Mobility Management software business, which helps companies manage smartphones, tablets and other mobile communications.
Goldman isn't optimistic on that front. It expects BlackBerry to fall short of expectations this week for both software revenue and earnings per share. If so, investors' exuberance will be severely tested.
Ian McGugan