By now, most investors have probably read or heard about the Wall Street Journal article from September 18, suggesting that the mere mention of a stock by hedge fund manager David Einhorn has a damning effect, long or short, in the 30-day period immediately following his words of wisdom. The Journal looked at 22 companies and found that the nine about which his comments were perceived as negative, saw their stocks drop 13% in the following month and in the 13 cases where his comments were perceived as positive, the stocks gained 10% in the next month's trading. They call it "being Einhorned." Heaven help your company if it gets the PowerPoint presentation; it's the kiss of death.

It's interesting, therefore, that on the same day the Journal was talking about the Einhorn Effect, a rumor was circulating that Greenlight Capital (Nasdaq:GLRE) had taken a short position in yoga sensation lululemon (Nasdaq:LULU). In June, the same rumor sent lululemon shares down by more than 7% in one afternoon of trading. While there's no way to confirm or deny the rumor, I can think of three reasons why Einhorn would want to short its stock.

Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments

More Money than Brains
According to Ashley Lutz of the Business Insider, there is a woman in California who has spent $15,000 over the past five years on lululemon clothing alone. The one-time electrical engineer and now stay-at-home mom even has her own website worshipping its products. Practicing Mitt Romney's ingratiating manner, Carolyn Beauchesne explains in the comments section of Ms. Lutz's article that $3,000 a year on workout clothes isn't a big deal given lululemon's demographic. Hasn't that been the problem haunting lululemon all along - that its clothes were for women and men who have more money than brains?

At some point the shorts - in the past they've included Whitney Tilson's T2 Partners - feel these brand-obsessed dilettantes will come to their senses and the gravy train will end for Chip Wilson, Christine Day and all the others who benefit from lululemon's success. Maybe David Einhorn has figured this out and will produce his findings during his speech at the Value Investing Congress on October 2. Last year he brought the now infamous Green Mountain Coffee Roasters' (Nasdaq:GMCR) PowerPoint presentation and we all know how that turned out.

SEE: How Companies Create a Brand

Here Comes Athleta
If you haven't noticed, Gap (NYSE:GPS) is firing on all cylinders these days. Its stock is up 94.45% year-to-date as of September 20, almost 58 percentage points higher than lululemon. Gap has outperformed lululemon over the past one-year and five-year periods. It's hiring all kinds of talented people who are committed to toppling the yoga queen. In the second quarter, its Athleta brand (the biggest competitive threat) opened 11 stores, an excellent result for a retail team that's been together for less than 18 months. By January 2013, it will have 35 stores open and at least another 15 on tap for 2013.

Given that Athleta will open 25 stores in 2012, I'd guess the real number in 2013 won't be much different from this year, so expect it to have 60 stores open by January 2014. Clearly that pales in comparison to lululemon's 119 stores in the United States at the end of July, but it's closing fast. In July, Bloomberg ran an article highlighting the ways in which Athleta imitates lululemon's operation, including putting stores nearby and running yoga classes inside its locations. There are two things that will ingratiate consumers to Athleta's way of doing business: first, its products are of similar quality and up to 30% less expensive; second, it's offering yoga teachers a 30% discount on merchandise, compared to the 15% lululemon offers. Considering Gap only bought Athleta in 2008 and opened its first retail store in January 2011, the progress it's made is significant.

The Patent Play
lululemon's most recent move to protect its turf is suing Calvin Klein and G-III Apparel Group (Nasdaq:GIII) for infringing on three design patents related to its Astro yoga pants. Design patents allow apparel companies to inexpensively protect a unique design for up to 14 years. Unfortunately, lululemon's lawsuit will have to demonstrate that Calvin Klein's pant is substantially similar in the eyes of an everyday person. Word on the street is that the waistbands of the two brands are completely different and lululemon has no case. It's possible that Einhorn's hired an expert to confirm this, knowing the court's rejection of lululemon's claims will broadcast to the world that its products are as the shorts always believed - good marketing and nothing more. Of the three reasons I've listed, this is probably the one most damaging to its future growth.

SEE: Patents are Assets, So Learn How to Value Them

The Bottom Line
David Einhorn's speech is less than two weeks away. Lululemon shareholders best pray he catches a cold and can't make the speaking engagement, because his words could be fatal.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  5. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  6. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  7. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  8. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  9. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  10. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!