When Considering Purchasing a Stock

In general, I've had the most success buying a stock when it's something I have a real-world gut feeling about.  For example, I had been hearing about and seeing Lululemon clothing on all my friends for months before I went into a store myself.  I thought, "$80 for pants I work out in???"  It bothered my pragmatic side, but I knew I was curious.  I experienced how well the clothing fit, how it flattered a woman's body, and then found out that the store also does alterations for free.  The branding is strong, customer service/shopping experience is great, and each store integrates local events and classes into their store.  Though I am typically a bargain-hunter, I bought into their product, and love to splurge on a nice treat every now and then.

In the case of HANS, I was surprised as I walked down the aisles of COSTCO to see this "healthy" alternative soda in the aisles.  I remembered drinking this in health stores as a kid.  But what really hooked me was finding out that my favorite soda is also part of the Hansen's company.  I like Blue Sky Free because I'm a sucker for soda, but don't want to consume all those empty calories (or harmful chemicals).  Well, Blue Sky Free uses Stevia as an alternative to sweeteners like aspartame, so I don't feel guilty about drinking soda.  Thus, my interest was piqued.

Getting back to it, these are the types of events or thoughts that trigger my interest in certain companies and their stocks.  But I don't buy them right away.  I then add them to my watch list and eyeball the stock's performance for a while (for me it can be a few weeks to months) to see if the stock is trending up or down.  I also do this because the market as a whole tends to have highs and lows together, so you want to make sure you buy a stock at the right time.  It also gives me time to read articles about the stock and familiarize myself with the company.  One thing I've learned from waiting and watching, if earnings reports are coming out soon, make sure you buy before the report is out if you think the stock will outperform estimates, because a stock's price will most likely shoot up, especially if the "buzz" on the stock is already bullish.

When I'm watching a stock, I'm reading news stories and articles about it, looking for signs of good or bad news and comparing it to its competitors.  Also, I look at a few technical numbers that I've grown to understand.  First, P/E ratio...this tells me how expensive a stock is, meaning how much people who are buying the stock are willing to pay.  It indicates the relationship between earnings and stock price.  A high P/E means that people are really feeling bullish and think the stock is going to perform really well.  However, as a P/E moves higher, it also could potentially mean that the stock is overvalued, and that the stock may take a hard fall the next time an earnings report comes out and does not perform as expected.

For example, LULU is at a P/E of 50.0.  My opinion is that a P/E around 20 is not scary.  At 30, I might still buy it.  At 50...I don't know that I would be willing to buy at that point.  By the way, AAPL (Apple) has a P/E of around 16.5 and is reporting earnings on Tuesday (I'm just saying I have great expectations for this stock).  But back to the point...I still think that LULU is an excellent brand, selling high-quality goods with great customer service and brand loyalty.  Even if their products are expensive, I really believe that you get what you pay for.  This article on IBD talks about how even though LULU is a top-5 stock on their list, big institutions are selling their stock.

Reading this, I'm feeling mixed.  I think that LULU is great, and its stock price was much higher back in July and September, around 60 points ("points" apparently is lingo for "dollars").  So should I hold out for a "good" day in the market and sell soon, or should I hold on for the long run?  The company can hardly keep up with demand, it is so popular, and new stores are popping up.  Further its Return on Assets is 32.21% and Return on Equity is 38.79%, two numbers that indicate profitability and efficiency.  Return on Assets tells us how efficiently the company uses its assets to generate earnings, as it is a measure of how a company uses its debt and equity to generate earnings.  So, it tells us how good a company is at turning investments into profits.  The higher this number is, the better.  The Return on Equity tells us how efficiently the company uses shareholder money, and thus the higher this number is, the better.  However, it does not take into account debt, and thus cannot be looked at by itself.  A high ROE may also indicate a high growth rate, if a company is reinvesting its profits into growing the company.  At some point, I had read that a ROA above 5% and ROE above 10% were a minimum for one investor to be interested in a stock.  I don't know how true this is, but regardless, I tend to follow these numbers, since this is a possibly indication of efficiency, profitability and growth.

One last and important number I've learned about.  That is Earnings per Share (EPS), which is exactly as it sounds: a company's earnings divided by number of shares.  This number is used to calculate a stock's P/E as well.  At each quarterly earning report, the company reports its EPS.  As far as I can tell, the way to make money in the stock market is to invest in companies that will keep meeting or beating analysts' expectations for EPS.  

So what do I think about LULU?  I am hesitant to say, since I both believe that this is still a company that is performing really well, yet I am worried about the company losing its bullish steam.  However, I think I will hold onto the stock, and see how it performs through the holidays.  I think the market as a whole has been down this year, and I'm hoping that future earnings reports and growth will raise this stock price a little further before I sell.