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(B)(N) LULU Lululemon Athletica Incorporated

December 7, 2012

Drama. Lululemon Athletica has been a hot stock for more than three years and since we bought it at $10 in 2009 and have held it more or less continuously in the Perpetual Bond™ to $70 now, we look pretty good too, don’t we (please see Exhibit 1 below). But we’d deem ourselves a failure – a wardrobe failure in this case – if the capital was ever at risk.

A glance at the Risk Price Chart (please see Exhibit 1 below) shows that we are entitled to include Lululemon in the Perpetual Bond™ simply because the ambient stock prices summarized as Stock Price (SP) at which we bought or held or sold the stock (Red Line, a step-function) exceeded our estimate of the current “price of risk” or the Risk Price (SF) (Black Line, also a step-function) – and for no other reason. We cared not a jot for the news of the day, earnings forecasts, realized or not, or any economic forecast or prognostication that suggested good clothes were too expensive (or not expensive enough) to wear (please see, for example, Insight, December 6, 2012, Is Lululemon’s hot stretch slowing? or Insight, November 13, 2012, Lululemon ranks top 3 for most productive U.S. retailer).

The reason is that stock prices above the price of risk are an “economic free good” and shouldn’t exist at all, and they won’t if they’re not earned (please see our Post, The Price of Risk, August 2012, for more information). Failures of heart and a rocky lifestyle are demonstrated by the occasional downside volatility which would be a “surprise” should we not be pre-prepared for it, so to speak. For example, we jumped the gap between $60 in 2011 and $50 or less six months later by simply enforcing the volatility-based stop/loss of minus ($8) (please see our Post, Popoviciu’s Volatility, August 2012, for more details on that calculation) although a more effective and certain approach (and one that we often use) would have been to “collar” the then current stock price of $60 using the bought put at $60 three months out and partially offsetting the cost of that by selling an opportunistic call with strike price $65 (which would have been executed). The difference is $13 per share ($65 instead of $52 if we waited that long) but it would appear to be rather greedy, one would think, to reject that outcome against the capital which was $10 and was still $10 but now “worth” $60. Not everyone agrees with that and that’s why they’re called gamblers.

Lululemon is trading at $74 today and the Risk Price (SF) is $72. The downside volatility is minus ($10) so that if we buy it today, we’ll need to collar it unless we are willing to gamble on a loss of $10 per share. The March put at $74 costs $5.75 per share today and the offsetting call at $80 sells (or “shorts”) for $3.60 per share. Hence, for a net cost of $74 per share for the stock plus an option cost of $2.15 ($5.75 less $3.60) per share ($76.15 in total) we can lock in our price at between $74 and $80 for the next ninety days if we can live with a possible loss of $2.15 per share if we need to execute the put or a possible gain of (only) $3.85 per share if we’re called out. But, of course, a lot can happen in ninety days and the option position is both saleable and malleable and needs to be adjusted to our benefit only if the stock price goes up.

Exhibit 1: (B)(N) LULU Lululemon Athletica Incorporated – Risk Price

(B)(N) LULU Lululemon Athletica Incorporated

Lululemon Athletica is engaged in the design, manufacture and distribution of healthy lifestyle inspired athletic apparel which is sold through a chain of corporate-owned and operated retail stores, independent franchises and a network of wholesale accounts.

(Please Click on the Chart to make it larger if required.)


We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of  investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
With No Fees and No Loads on Capital

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Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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