Lululemon's Sell-Off Looks Overdone: A Contrarian Case

Lululemon Athletica Inc. (NASDAQ: LULU) has to be one of the most painful charts for retail investors to look at this year. After gaining nearly 90% through the end of January, shares are now down more than 60%, closing Monday just under $160. 

That puts the stock back at 2018 levels, a shocking disconnect from the broader market, which has been hitting record highs all summer. This collapse raises an obvious question for a brand that still dominates the high-end athletic apparel space: has Lululemon been unfairly dumped, and is there now a contrarian opportunity taking shape?

What's Driving the Sell-Off in LULU?

There are several reasons why sentiment has soured so quickly. Tariffs have been a significant concern, with the company's latest report showing its sales and margins coming under pressure. Analysts have been flagging a fading consumer buzz, particularly as competition in the premium apparel space intensifies.

Some, like KeyBanc, have also noted that near-term catalysts appear limited, making it difficult for the stock to mount a strong defense, let alone a potential rebound.

On the chart, things have looked equally dire. The breakdown from January's highs has been relentless, and Lululemon shares have struggled to find a floor. The latest drop has left the stock testing the $160 area, which some will see as potential support.

But given how quickly the bears have pressed their advantage, there is no guarantee that that level will hold—if it fails, the following line in the sand would be around $130, a low first seen during the pandemic-era sell-off.

Fundamentals Still Resilient

What makes the situation particularly interesting is that while Lululemon's fundamentals are hurting, it can't be said they're in free fall. In their Q2 report at the start of September, revenue actually came in ahead of Wall Street estimates and was up on the previous quarter.

It seems the sell-off has been less about pinched financials and more about shifting sentiment. Investors appear to be completely spooked about the damage tariffs are both doing and could continue to do, while the increased competitive landscape isn't helping. 

Analysts See the Worst Priced in for LULU

But as some analysts have pointed out, the worst of these fears may already be priced in. At Monday's close near $160, shares are well below even the more cautious price targets issued recently. 

While most on Wall Street have stepped back from being outright bullish, even the more cautious voices now hint that the selling is overdone. 

Telsey Advisory, for example, just lowered its rating on Lululemon down to Market Perform but gave the stock a $200 price target, similar to Bank of America's recent cut to Neutral and refreshed $185 target. 

Considering Monday's close had Lululemon trading just below $160, both of these updates imply some upside from current levels. This means the stock might have quite an attractive risk/reward profile, bolstering the case for contrarians to start stepping in. 

Already Technically Oversold

The technical setup supports this. Lululemon's relative strength index (RSI) is hovering around 26, which suggests the stock is currently extremely oversold. Historically, readings this low have often preceded meaningful rebounds, if not complete recoveries. 

If shares can start to consolidate in the coming sessions, the bears may be forced to take a breather. That skews the risk-reward balance in favor of the bulls. Even if Lululemon takes more time to stabilize properly, the downside from here looks relatively limited compared to the potential upside if sentiment improves.

Weighing Up an Entry Into Lululemon Stock

There's no getting away from the fact that Lululemon's sell-off has been brutal, and the stock's chart remains under pressure. But for investors with a risk appetite, this is the kind of setup that can reward patience. 

Building a position near $160 may feel uncomfortable. Still, with shares trading well below even recently downgraded price targets, while simultaneously sitting deep in oversold territory, the opportunity is hard to ignore.

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The article "Lululemon’s Sell-Off Looks Overdone: A Contrarian Case" first appeared on MarketBeat.