The Break-Out Stock You Can’t Afford to Ignore

I couldn’t believe my eyes when I walked into the store. There were literally dozens of smartly-dressed women excitedly seeking out their sizes in a variety of clothing items. The shoppers were completely undeterred by the relatively high prices but rather focused on just how good their purchases would make them look at the gym, yoga class or just as casual wear.

I quickly remembered Fidelity Investments’ Peter Lynch and his investing rule, “buy what you know,” as my wife came out of the dressing room modeling her latest tennis/workout skirt for my approval. Not only did the outfit look great, but the craftsmanship and unique fabric sealed the deal — despite the very high price point.

If you haven’t guessed it, then the store we were in was lululemon athletica (Nasdaq: LULU). Riding on the resurgence of the fitness/yoga craze that started in the 1970s, lululemon has built a powerhouse fashion empire on women’s desire for quality, looks, comfort and functionality. It’s also been one of the hottest stocks on Wall Street in recent memory…

Interestingly, half the women in the store didn’t look like they went to the gym regularly, yet they were still buying the expensive workout gear. (Obviously, there is a strong interest to dress in fitness gear whether or not one actually attends gym sessions or yoga class.) Combine the actual resurgence of the fitness/yoga craze with the look being converted into fashion for everyone, and it creates a thriving industry.

#-ad_banner-#But I’m not interested in chasing shares of lululemon today. Seeing the feeding frenzy in the lululemon store did remind me, however, of how popular running shoes have been since the 1970s. Regardless of whether or not the person ran regularly, running and athletic shoes are purchased in vast quantities for the comfort and style provided. This macro fitness and fitness wannabe trend led me to focus on a different stock for today: Foot Locker Inc. (NYSE: FL).

Talk about being surprised with what I discovered… Fundamentally and technically, Foot Locker appears to be a solid “buy.”

Founded in 1897, Foot Locker, together with its subsidiaries, is run as a retailer of athletic footwear and apparel. The company is split into two segments, athletic stores and direct-to-customers. The Athletic Stores segment retails athletic footwear, apparel, accessories and equipment under various formats, including Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction and CCS. It operates about 3,369 stores in 23 countries in North America, Europe, Australia and New Zealand. The direct-to-customers segment includes CCS and, which sell athletic footwear, apparel, equipment, team licensed products and private-label merchandise through catalogs, mobile devices and websites.

Just like lululemon, Foot Locker is riding the fitness craze resurgence to new heights. It appears to me that Foot Locker is even better positioned for longevity with its athletic footwear than lululemon, which thrives on its sporty outfits driven by fickle fashion tastes.

The latest numbers from Foot Locker indicate strong growth. Profit in the first quarter of 2012 ramped up to $128 million, or$0.83 a share, compared with $94 million, or $0.60 a share last year. Sales advanced 8.7% to $1.58 billion in the same period. Comparable-store sales climbed 9.7%, beating the 6.6% average analyst estimate.  The last quarter ended with $909 million of cash and shortterm investments, an increase of $110 million compared with last year.

In addition, the Footlocker board just approved a $10 million increase in its 2012 capital expenditure program, taking the total to $170 million.  The additional funds are targeted primarily at new projects in the women’s business and for technology upgrades.

lululemon proved the lucrative nature of the woman’s athletic apparel business. Time will tell whether Foot Locker’s ramped up efforts in this market will pay off, but I have high expectations. In addition, the company is aggressively eliminating nonperforming stores and will be offering Olympic-themed merchandise in the coming months.

Technically, this stock is a screaming “buy” for momentum-based, trend-following investors. Buying breakouts above the current high make sense for investors.

Risks to Consider: Although Foot Locker has proven its longevity and ability to change with the times, it remains a business tied to fashion tastes. It appears that the fitness/athletic craze has become a permanent part of our culture, however, this could change, making businesses catering to the fitness market a dinosaur.

Action to Take –> This stock is a solid technical “buy on any breakouts above the current high, and the current fundamentals support further upside.But like any stock investment, be sure to use stops and position size accordingly, as no one really knows that the future holds.