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Kaminsky's Call: Beware This 'Cult' Retail Stock

Tuesday, 6 Jul 2010 | 10:28 AM ET

One of the hardest things to do as an investor is separate a good product from a good stock.

The common refrain to "buy what you know" too often leaves investors purchasing terrible stocks for the simple reason that they like what a company makes.

Lululemon Athletica is a classic example.

I love the products. In fact, I'm not ashamed to admit I wore one of their shirts this weekend as I biked in the 100-degree weather.

Perhaps it was the intense heat, but as I pedaled away, a fleeting thought entered my head: should I buy LULU?

The company is growing by leaps and bounds. It's product is truly excellent. Could this be the next great apparel story?

My "Call-to-Action" is simple: No.

Despite obvious appeal, Lululemon is what I like to call a "cult stock." It's earnings multiple continues to defy gravity, as investors remain as loyal to the stock as its customers are to the stores.

But the problem with such high growth stocks is that they inevitably post some sort of negative sales surprise, and with the consumer weakening and job growth stagnant, it doesn't seem like such a stretch that people may start to cut back on ultra-expensive athletic wear, however good it may be.

But there's something else working against Lululemon.

The company doesn't break out sales per square foot numbers for it newer US stores, so the analyst community instead relies too heavily on figures from the more mature, Canadian stores. That's not a fair apples-to-apples comparison, and it could lead to some exaggerated growth expectations.

For a high-growth stock, that's a recipe for a short-term disaster, no matter how good the product is, or how hot it gets outside.

Related Link:

"The Strategy Session," hosted by David Faber and Gary Kaminsky, airs weekdays at Noon ET on CNBC.

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Gary Kaminsky does not hold any equity positions.

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