Lululemon Athletica Inc (LULU)
Risk Tolerance:
My risk tolerance is moderate to high. I am very aggressive in my search for risky companies, but will only invest in them if the return justifies it. It has always been fascinating to me the way riskier stocks move and interact with the market, but at the end of the day, it will always come down to having solid numbers in the financial statements.
Metrics Used:
For the stock screener, I decided to utilize 7 criterion to select my stock. The first was Beta, this measurement is used to measure the volatility/risk of the security. The market has a beta of one, so any position that has a beta greater than one will be more volatile than the market, less than one will be less volatile. I used beta as a benchmark due to my risk appetite, knowing that I would risk more for the possibility of capturing a larger return.
The second metric was Market Capitalization. This is the “size” of the company and is calculated by taking the outstanding shares and multiplying that by the price of the stock. This helps give a better picture of how established the company is. In SIF, we cannot invest in a business if their market cap is not above $2 billion, for that reason I sifted through all of the mid and small cap companies. I did not include mega cap companies due to their already dominating presence in the market and my risk appetite. My goal was to find a company that had room to grow and would add value to SIF’s portfolio.
Next, I chose Free Cash Flow. This is a measurement of a company’s ability to generate cash after subtracting capital expenditures. If a company has a large amount of cash, they can fund new projects, pay dividends, or pay off debt. I utilized this metric due to the sector I wanted to invest in (consumer goods), with my risk appetite, I want my company to have a large amount of cash to invest in new projects. This sector is always evolving, so if a company wants to gain market share, they must be introducing new and appealing products to the end consumer.
The fourth metric I used was Return on Assets (5 Year Average). This measures the earnings the company is making on it’s invested assets. To give the investor a better picture of the financial health of the company, I used the average of 5 years, that way there are no outliers. It can be calculated by dividing the net income of the company by the total assets. I used this benchmark because it allows me to see how the management team is utilizing their assets to generate earnings. If I am taking the risk, I want to know I am getting a greater return. If it is negative, that will tell the investor that this company is either new or their executives are not utilizing their assets to generate you a return.
The fifth metric I utilized was the Return on Equity (5 Year Average). This measures how much profit is generated with the shareholder’s investment. As previously stated, to oust outliers, the average of the trailing five years was taken. ROE is calculated by dividing the net income by the shareholder’s equity. This measurement was used to make sure the company is using the investor’s money wisely. Again, if I am taking a risk, I want my return. If a company cannot generate a return for my money, then that company will not be invested in.
The last metric I used was the Quick Ratio. This is an indicator of the company’s ability to pay off short term debt with liquid assets. It is calculated by subtracting the current assets and inventories, this number is then divided by the current liabilities. The higher the quick ratio, the more liquid the company
