Educational Guide: How to manage a Red Position (Real Case Study: Lululemon)
Educational Members' Note for May 22nd
Hi Everyone,
In today’s note, I want to use Lululemon’s 2024 selloff as a Case Study to discuss the concept of managing challenging positions in this brief educational guide.
We’ve had a string of really good opinions shared lately - AAPL, Costco, PDD, AMD, BABA - but there is one stock that has been very unloved by the market (to put it lightly).
That name is Lululemon, and in this email, I want to go through the psychology of a red trade, how to evaluate when a bottoming process occurs, and how to manage a losing position. Everything I share is purely my opinion only. There is no “best way” to do things, but I am happy to share with you how I think about it from a big picture perspective.
I am going to release my LULU DCF Conclusion Study to the public (link here) so that folks can understand my thinking on April 9th when I published it. At time of writing, LULU traded 355-ish.
LULU is my biggest red investment idea in 2024. A few weeks ago, there was a bullish sequence from 335 to 360 which brought us back to breakeven (360ish Cost Basis). However, I held on, and the market has been unforgiving on this company thereafter.
In the grand scheme of things, my LULU position being red is the cost of doing business. Overall 2024 has been good to us, and LULU being red doesn’t bother me at all.
However, it makes for a good case study on how to manage challenging positions and I will use this opportunity to make a brief educational guide out of it to share how I think about these situations.
We will discuss the following:
How to tell if a Stock is falling due to Valuation compression or due to Fundamental Deterioration (they are different)
How to evaluate a Stock in an objective way after it has fallen significantly (hint: always refer to the DCF Concepts)
When is it appropriate to convert a Call Option to a Sell Put Position, or vice-versa?
Trade Psychology (Why Averaging Down isn’t the best approach, if other options are available)
Bottoming Price-Structures that I look for to sense that a recovery may be underway (based on my personal style)