According to Michael Burry’s latest Substack note, he believes Lululemon’s incoming CEO will take over with a low bar, potentially creating room for a reset if the business returns to growth.
- Michael Burry plans to buy more Lululemon shares below $100, calling the stock a “fat pitch.”
- According to him, LULU could generate 15% to 20% annual returns over 15 to 20 years if the brand regains its footing.
- Burry also named JD.com and Alibaba as the other “super fat pitches” in his investment universe.
‘The Big Short’ investor Michael Burry is planning on picking up more shares of Lululemon Athletica (LULU) once the market opens on Friday, calling the shares a “fat pitch” below $100.
In his latest Substack post, Burry also identified JD.com (JD) and Alibaba (BABA) as other “super fat pitches” in his investment universe.
LULU stock fell nearly 20% in pre-market trading and is on track to fall below $100 once markets open. On Stocktwits, retail sentiment around the apparel company remained in ‘bullish’ territory over the past day.
JD stock gained around 1.6% in pre-market trade, while BABA’s shares edged 0.8% higher. Retail sentiment around JD.com trended in ‘bearish’ territory over the past day, while sentiment around BABA trended in the ‘extemely bearish’ zone.
What Is A ‘Fat Pitch’?
In investing, an opportunity where the potential reward appears unusually attractive relative to the risk is called a ‘fat pitch’. The phrase comes from baseball, where a ‘fat pitch’ is an easy pitch to hit. For Burry, the term describes a stock trading at a price low enough that a return to even modest growth could generate strong long-term returns.
Why Does Burry Think LULU Stock Is A ‘Fat Pitch’?
According to Burry, Lululemon is currently where Abercrombie & Fitch, Ralph Lauren, as well as Lululemon itself was in 2017. He stated that investors could be rewarded when they bet against the idea that a strong consumer brand will return to growth.
He added that the appeal is less about the company’s most recent second-quarter (Q2) results and the “slow start” to the third quarter (Q3), but more about what is already reflected in the stock price.
Burry said he went through the company’s 10-Q, conference call transcript and 8-K and concluded that “clearly things have changed for the worse.” However, at potentially around $99.50, Burry calculated that LULU trades below his estimate of intrinsic value in scenarios where the company eventually returns to growth.
New CEO Gives Burry Another Reason To Bet On A Recovery
Burry stated that even after lowering his assumptions for U.S. and China growth, global comparable sales and operating margins, there’s still potential for 15% to 20% annual returns over next 15 to 20 years if the brand regains its footing.
The biggest reason to believe in a turnaround, according to Burry, is Lululemon’s new CEO Heidi O’Neill who is set to take over next Tuesday. “Nevertheless, a new CEO is coming in and I smell the stench of a kitchen sink left with no running water for far too long,” he wrote. “The new CEO is coming in with the lowest of bars, just as one would expect from a fresh-from-battle Chairwoman who silenced her biggest critic and won the choice of a CEO who could not start for six months just because she could.”
Burry also pointed to Lululemon’s balance sheet, including roughly $1.3 billion in cash and no financial debt, as downside protection. The company’s decision to retire 7% of its shares at $142 is another factor in his thesis.
According to Burry, the current deterioration is temporary, not a permanent breakdown of the Lululemon brand. That gap between depressed expectations and the possibility of a return to growth is what makes LULU a “fat pitch” for Burry below $100.
BABA, JD Stocks Also On Michael Burry’s Radar
“Right now the only others that are clear super fat pitches in my universe are JD and Alibaba. I own the former but not the latter. I plan to buy Alibaba stock soon,” he wrote.
JD stock has fallen over 6% year-to-date, while BABA stock is down over 26%.
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