We recently compiled a list of 10 Best Quality Stocks to Buy According to Analysts. In this article, we will look at where Lululemon Athletica Inc. (NASDAQ:LULU) ranks among the best-quality stocks to buy.

Income-Focused Investing

The stock market has seen a notable 20% increase year-to-date, but as it approaches the seasonally volatile months leading up to Election Day, potential volatility is expected. The S&P 500 has historically pulled back 5% to 10% around election time but tends to recover afterward.

Instead of cashing out, investors are encouraged to take advantage of any market pullbacks. Historically, when the Fed cuts rates without an impending recession, it creates a favorable environment for broader market performance. Mona Mahajan, Edward Jones senior investment strategist, recently appeared on CNBC to discuss her similar sentiment on these latest market trends, and where investors can find opportunities right now. We talked about this in our article about the 10 Best WallStreetBets Stocks To Buy Right Now, here’s an excerpt from it:

“When asked if investors should consider cashing out and taking a holiday for the remainder of the year, Mahajan advised against such a move. Instead, she suggested that if there are pullbacks or corrections in the market, it would be prudent to lean into those opportunities… Additionally, rate cuts typically lead to expanded valuations, particularly for sectors that have lagged behind in this regard. She emphasized that lower borrowing costs from Fed rate cuts would benefit both consumers and corporations.

In terms of investment strategies during potential downturns, she recommended focusing on cyclical sectors such as utilities and industrials while also maintaining exposure to technology and the artificial intelligence sectors. Mahajan underscored that diversification would be key over the next 12 to 18 months.”

Global Investment Strategist at ProShares Advisors, Simeon Hyman, appeared on CNBC on October 2 to emphasize ‘income’ as a key focus, highlighting the opportunity in fixed-income markets, which could provide 10-15% returns if geopolitical tensions worsen. He thinks that the US economy is stronger than the rest of the world despite tensions.

Simeon Hyman emphasized the importance of the term ‘income’ in the context of current market conditions, noting that the market was just 1% off its all-time highs. This situation presents a salary cut for income-oriented investors, highlighting the challenges they face. However, the fixed-income market offers a silver lining; it currently provides enough yield to cushion against worsening geopolitical tensions. For instance, the yield on the 10-year bond is nearly 4%, and there is potential for it to drop to 3% or lower if significant negative events occur. This scenario presents an opportunity for investors to realize gains of 10% or 15% on bonds in a tumultuous environment, a situation not seen in over a decade.

Despite the current market being down by 3.7%, which is slightly less than 4%, Hyman insisted that rounding was at play. He expressed surprise at this performance given ongoing geopolitical tensions but pointed out that positive economic news in the US persists. Specifically, there has been a 50-basis point cut and indications of a soft landing for the economy. A month-over-month increase of just 0.1% suggests that if one can overlook geopolitical issues, the US economy is faring better than many others globally and remains on solid economic footing.

Additionally, Hyman proposed a covered call strategy focused on the Russell 2000 index, which has been underperforming compared to the S&P 500. He described this strategy as beneficial because it allows investors to generate income that could offset recent losses while maintaining a bullish position in small caps. Historically, rate cuts have positively impacted small-cap stocks, and this strategy enables investors to capitalize on that trend while also generating income through covered calls.

For risk-averse investors, the current emphasis on fixed-income markets as a viable investment option aligns well with the insights shared by Simeon Hyman, who highlighted the potential for 10-15% returns in bonds amid geopolitical tensions. Additionally, they may also explore quality stocks with reliable growth histories, which can provide stability in uncertain market conditions, similar to the defensive strategies Hyman suggested.

Methodology

To compile our list, we first sifted through Vanguard U.S. Quality Factor ETF holdings to find the ones with an upside potential of over 15% as of October 4, 2024. We then selected the 10 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of their analysts’ upside potential.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Lululemon Athletica Inc. (NASDAQ:LULU)

Average Upside Potential: 23.40%

Number of Hedge Fund Holders: 45

Lululemon Athletica Inc. (NASDAQ:LULU) designs and retails athletic clothing products. It offers a range of products for both men and women, including yoga pants, tops, jackets, and accessories, and is known for its innovative designs, comfortable fabrics, and commitment to sustainability. It sells through sold through different channels, including direct-to-consumer via e-commerce, company-operated stores, outlets, sales to wholesale accounts, recommence, license and supply arrangements, and sales from temporary locations. It also operates Lululemon Studio, which offers in-home connected fitness and related content subscriptions.

The second quarter of fiscal 2025 at the company saw a revenue growth of 7.33% year-over-year. Sales of men’s clothing increased by 11%, women’s by 6%, and accessories by 7%. It also bought back $584 million of its own stock in Q2, bringing the total to $1.2 billion this year. The total revenue generated was $2.37 billion.

The company is doing especially well in Asia. In China, revenue increased by 34% year-over-year. Some mistakes with products and inventory have slowed down innovation. It’s expected to grow its international revenue by 4x by the end of 2026. In the last quarter, international revenue grew by 29%, or 31% when adjusted for currency changes. It’s now working on new styles of tops, shorts, and tracksuits for 2025 to help it return to its previous level of new products before next spring.

It’s trying to double its sales from men’s clothing, online sales, and international sales by 2026, as a part of its plan called “Power of Three ×2.” It has a lot of cash and has reduced its inventory, which is good for future growth. As Lululemon Athletica Inc. (NASDAQ:LULU) continues expanding outside of North America, it is well-positioned for continued growth in the athleisure market. Despite recent challenges, it seems to have a promising future.

Middle Coast Investing stated the following regarding Lululemon Athletica Inc. (NASDAQ:LULU) in its Q2 2024 investor letter:

“I mentioned last quarter and higher above that I like buying quality stocks on sale. Lululemon Athletica Inc. (NASDAQ:LULU), the 2nd worst performer in the S&P 500 this year, qualifies. I published a full thesis on the stock before its most recent earnings, but the basics: the yoga pants and clothing company has had an amazing post pandemic run that is approaching its end. Its growth in the U.S. is slow/non-existent at the moment, but it is growing very fast in China and Europe. I think that international growth is likely to endure, and that its U.S. slowness is likely to be temporary. Lululemon shares are not ‘cheap’, but they are on sale for an average price, and I think the company will grow faster than average over the next five years. I would be wrong if Lululemon is a fad gone bust, or faces a huge post-pandemic hangover as people get used to leaving the house more. We’ll see.”

Overall LULU ranks 4th on our list of the best-quality stocks. While we acknowledge the growth potential of LULU, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LULU but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published on Insider Monkey.