"Shooting Stars"

I have written several times about "shooting star" stocks. Small cap stocks. usually producing a very popular consumer product.Investors assume that because "everyone is buying/wearing the product: the stock is a good investment. In a classic behavioral finance flaw, investors extrapolate the performance into the future making the valuation very high and any earnings disappointment likely to trigger a sharp decline.

Some classic examples of this have been crocs:

Deckers, the manufacturer of UGG boots (remember those), The chat is 50% below its high.

Right now the classic example is Underarmour.(UA) They had much success with some niche products in football equipment and football shoes, But those products contained no technology that could be easily copied.which it was and when Nikes marketing machine gor behind their competing product Underarmour couldn't keep up. The company ventured into other types of atheletic/leisrue shoes against the "big boys", Addidas and Nike it was left in the dust.

Another stock I would call at this point a "mini shooting star" is Lululemon (Lulu) with its premium priced yoga wear sold exclusively through its own stores. Their formula has already been copied by Athleta and its efforts in men's products have had little success.

So far it recovered from a mega selloff but is still 30% below its high. And the 50% selloff in 2014 followed by the huge runup shows how sensitive the stock is to earnings disappointments.

Will LULU experience a fate similar to UA. I certainly don't know. But I do know that the big guns of NIKE are aimed right at lulumenon's target market. (BLOOMBERG)

Nike Coming for Lululemon, Sharpens Focus on Women's Wear

By

Matthew Townsend 

Sports giant to put yoga pant studios in 5,000 stores

• Company is also refocusing on innovating in women’s gear

Nike Inc. is increasing investments in yoga pants and sports bras as part of a quest to revive growth, intensifying its battle with Lululemon Athletica Inc. for women.

Nike will open pant studios in 5,000 stores on Nov. 1 to highlight new styles for workouts and leisure, the company said in supplemental documents to an investor presentation on Wednesday. A presence in thousands of stores would dwarf the footprint of Lululemon, which helped turn yoga and fitness gear into everyday attire. It has 421 locations, mostly in the U.S. and Canada. Even after the drop LULU is at a p/e of  32. well above the p/e just below 26.

Regardless of what happens to LULU in the future the takeaway is clear. Stocks that have a high public presence because "everyone is buying it" or there is always a line probably don't make a good investment. Of all the categories of stocks across the style box (large cap growth, large value, small growth and small value). Small growth the "sexiest category" have the worst risk/return.

One more in the shooting star category in the restaurant category. Chipotle (remember the rapid expansion and lines out the door at that one ?)

And a possible shooting star: Shake Shack which went public in December of 2017 and last I saw in NY and  Los Angeles had lines out the door and is still adding locations rapidly. One thing for sure it has been a roller coaster since the ipo. I'm not sure many investors would have had the resilience to hang on as the stock fell close to 50%  Shake Shack trades at at p/e of a 65.

Bottom line: not a good idea to pick stocks based on 'there's always a line out the door' or "everyone is wearing them".