That Dude Who Got Creamed Shorting Netflix? He’s at it Again With Lululemon
Does Whitney Tilson’s short position on Lululemon Athletica (LULU) shares mean he’s once again found a hugely profitable play that other hedge fund managers have missed? Or is this another Netflix (NFLX) debacle in the making?
Tilson showed up on CNBC Friday dissing a handful of stocks he’s currently shorting, including athletic fashion maker Lululemon. We heard him talking similar smack about Lululemon shares when his T2 Partners was short the company back in April 2010. And while we don’t know what exactly became of those early positions, we do know that investors who held Lululemon shares instead of shorting them during the time since mostly made a ton of money: Lululemon’s up over 500%.
Few investors seem interested in betting on a Lululemon share price drop today. The roughly 16% short interest at the end of January was even lower than it was the month earlier. While there were some opportunities to lose money on the shares last fall, the price has mostly run straight up since early December.
It’s a picture that could make you forget Tilson’s past fame for running some of the all-time best short sales, making millions betting against housing and financial stocks before other hedgers even knew what “subprime” meant. But the Lululemon short so far looks more like the train wreck he conducted last year with Netflix, when he shorted the stock on a big run up and covered just months ahead of a 70% drop. He pulled it out with a big long position toward the end of the year that’s up more than 50%. (We all get to make fun of that wild ride now solely because Tilson mans up and makes his short positions public. Most hedge fund managers keep their short lists secret and, therefore, some of their more humiliating mistakes private.)
As for Lululemon, Tilson considers the yoga pants and similar clothes it sells faddish, and its share price completely over-the-top. YCharts looked at Lululemon’s valuations against Under Armour (UA), another growing athletic clothes company that’s wildly popular with investors, and discovered that, oh yeah, Lululemon is expensive. Lululemon’s PE of 57 and a price/sales ratio of 8, it’s well over even Under Armour’s valuations. YCharts Pro gives Lululemon the worst possible score for value but good scores for fundamentals.
Lululemon believers are counting on its current sales boom to make its share price more reasonable. Investors have been impressed with profits, too, which are often unimpressive in fast-growing companies. That helped push Lululemon’s market cap over $7 billion.
In other words, Tilson’s Lululemon play is no subprime short. The subprime shorts followed a lot of original, heavy-duty analysis of millions of mortgages to uncover rising default rates that few others had spotted. The Lululemon short is simply a bet against investor exuberance that often follows fast-growing companies. It’s probably the most popular basis for short selling around, because it often works. For every long-running pricey gainer like Chipotle Mexican Grill (CMG) or Whole Foods Market (WFM), there are dozens of formerly-pricey stocks brought permanently down to earth. Green Mountain Coffee Roasters (GMCR) shares sold for 85 times earnings last year before a sell-off took about 60% off its share price.
Tilson’s not so open that he discloses the details of his short-covering obligations. But we don’t expect to see him to follow his Netflix playbook and cover that Lululemon bet before there’s a serious decline in its price. Because getting grief for a mistake you didn’t have to admit is bad enough. No one wants to make the same mistake twice.