Stocks to Buy Now, or Just Another Fad?

Email
    Text size

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.

The full article is reserved for subscribers of Money Morning.
Sign up now for immediate access - it's absolutely free!

(After submitting your email address the page will refresh with the full article. You will receive a welcome email from Money Morning including the benefits of your free subscription.)