William J. O'Neil, the founder of Investor's Business Daily, developed a popular stock-picking methodology that goes by the acronym "CAN SLIM."
You can read the details of the strategy in his book called "How to Make Money in Stocks" but the essence of the approach is a combination of fundamentals and technicals that identify stocks with very strong earnings as well as exceptional relative strength. It is sometimes referred to as a "buy high and sell higher" approach.
Lululemon (LULU) is a classic example of that approach Thursday. The company earned $1.85 per share versus estimates of $1.74, raised year-ahead guidance and received a number of price target increases.
The stock has a rough cup-and-handle pattern, but the handle is too long to meet the standard criteria. The breakout is a little too strong and makes for a less optimal entry point. However, the big breakaway gap is creating exceptional relative strength and that is key.
Currently LULU trades with a trailing P/E multiple of 38x, with 15-20% growth expected in the next two years, which makes it a bit expensive. Still, buyers of plays like this expect more earnings beats and estimate increases due to the operational momentum.
The prudent approach to a trade of this sort is to start with a partial position and then look for additional entry points as the stock digests the big move. It is important that market conditions remain positive and a trailing stop is necessary.
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