After being one of the hot stocks to buy a few years ago, Lululemon Athletica (Nasdaq: LULU) has hit a rough patch.
The company this week had to recall yoga pants made with fabric known as Luon because it was overly transparent - meaning Lululemon customers were walking around with see-through pants.
The products make up about 17% of all "bottoms' sold by the company. According to The New York Times, the recall is expected to account for about $60 million in lost sales.
Lululemon investors saw the stock take a 10% hit this week after the pants debacle.
And now, with some of its most popular products off shelves, the company has opened up the window for another "trendy" fitness chain to play to pantsless consumers.
That's one of the dangers of investing in a fad stock - it's not going to be popular forever.
And even though Lululemon's shares have soared more than 340% in five years - beating returns of both Apple and Google - its success isn't based on solid company fundamentals, but on trends and investor hype.
Here are a couple other "fad" stocks that might not be able to deliver for investors on consumer enthusiasm alone.
Stocks to Buy, or Avoid? - Annie's (NYSE: BNNY)
Perhaps you've heard that organic foods are big business these days. That is part of the reason Whole Foods (Nasdaq: WFM) is a momentum/growth stock.
Unfortunately, that does not mean all organic foods purveyors belong in investors' portfolios. A fine example of one that has the potential to give investors indigestion is Annie's Inc. (NYSE: BNNY).
One of Annie's biggest problems is that it's far from a wide-moat business.
Not only must Annie's contend for consumers' affections with Whole Foods, but other major, traditional food companies are getting into the organic craze.
For example, General Mills Inc. (NYSE: GIS) has been involved with organics for some time. Companies such as General Mills can be a real thorn in the side of Annie's because the bigger food producers can sacrifice margins in some market segments in favor of moving volume. A small company like Annie's cannot do that because as margins erode, so does the bottom line and there goes the growth story.
Annie's is arguably a mess right at this moment. A recent recall of its branded frozen pizzas forced the shares lower, though the stock has since rebounded. That does not change the fact that this stock trades at much richer valuation than Whole Foods, a company with a history of generating returns for shareholders. Whole Foods trades for about 38 times trailing earnings. Annie's goes for about 108 times trailing earnings.
Annie's is awash in other problems, too. For starters, some of the company's products, for example its equivalent to the popular Pepperidge Farm Goldfish, are more expensive but not noticeably healthier than the rival product.
Second, insiders have been selling the stock at an alarming rate, with insiders owning 85% less stock than they did six months ago, and the stock's short float is 17.3%.
Also, Annie's cash position (or lack thereof) is a concern as well with $4 million on hand as of October 2012.
Stocks to Buy, or Avoid? Chipotle Mexican Grill (NYSE: CMG)
Since the 2008 market crisis, shares of Chipotle Mexican Grill Inc. (NYSE: CMG) have jumped a phenomenal 654%.
Chipotle has built a strong reputation for serving high-quality, locally grown, organic ingredients in its burritos, tacos and salads. That combination has given the chain a loyal and satisfied set of customers, as well as shareholders.
But that doesn't mean it's a stock to buy.
As Money Morning Chief Investment Strategist Keith Fitz-Gerald explained, this company's amazing growth story could be ending.
"If you look before last summer's drought increased chicken and beef prices that really ate away at Chipotle's bottom line, the company was trading above $400 a share," Fitz-Gerald said last month. "Now it's around $315. Chipotle's P/E has dropped to 38, but its stock is still up more than 500% in the past four years. To me, that's overvalued."
As Fitz-Gerald explained, same-store sales growth slowed to just 4.8% in the third quarter of 2012 from 8% in Q2.
"I think it's going to have problems continuing its growth story," he said. "So any investor who's thinking about buying Chipotle now that it's fallen, I think would be wise to avoid the stock - particularly considering the company's 2013 calls for flat to low single-digit growth in same-store sales."
To make sure you don't add any "fad" companies to your "stocks to buy" list, check out these three other overvalued stocks investors have fallen for.
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