Following the lycra
Following the fitness trend might be good for your health - but it could be bad for investors.
Coca-Cola (NYSE:KO), McDonalds (NYSE:MCD) and Hershey (NYSE:HSY) are some of the most valuable brands in the world. In fact, Forbes rates them as numbers 4, 6 and 98 respectively. But have you heard ofLululemon Athletica (NASDAQ:LULU)? You won’t find them on the Forbes list at all.
Lululemon, are designers and distributors of their own brand of “activewear” which is otherwise known as clothes that you can wear to the gym or down to the shops. If you'd bought shares in the company five years ago, you'd have made 144% on your investment. Nike (NYSE:NKE) and Foot Locker (NYSE:FL) have fared even better, returning 197% and 416% respectively. The more famous ‘junk food’ brands have fared less well, returning 34%, 31% and 98% over the same period.
The difference may be due to the trend towards people living healthier lives. Pies and Kit-Kats have been replaced by protein shakes and kale, whilst the chief executive of Levi Strauss refuses to say the words “yoga pants” due to the damage they've done to sales of the once iconic denim jeans brand.
On the Australian market, vitamin supplement manufacturer Blackmores (ASX:BKL) has seen its shares more than quadruple over the past year.
Nielsen data recently showed that Australians are now buying vitamins more than tea and coffee at supermarkets. No doubt there are other reasons for the rapid rise of Blackmores – not least growing sales to China – it demonstrates the momentum behind many ‘wellness’ stocks.
If you asked a random person on the street to make a decision between a portfolio that earned on average 55% or 253% over the last five years, most would pick the latter. This is known as the representativeness heuristic, where people extrapolate the results of a small sample.
The ‘activewear’ industry is now enormously competitive. Kmart is the latest entrant and is selling a range for less than $20. When the low-price general merchandisers enter, it usually means the market is close to saturation and returns will be eaten away by competition.
Blackmores currently trades at 35 times forecast earnings per share for 2016; only the most bullish of scenarios would justify a buy at such prices.
A problem with investing behaviour is the fear of missing out on an opportunity. Many spot trends and jump in at elevated levels. What many don’t realise is that by the time you've spotted a trend, the opportunity has likely passed.
Staff members may own securities mentioned in this article.
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