Lululemon Athletica Inc. (NASDAQ: LULU) closed 10.31% higher on October 16 in monster trading volume on news the company was joining the S&P 500.
The retailer of athletic and leisure clothing is replacing Activision Blizzard, which is no longer a publicly traded company after Microsoft Corp. (NASDAQ: MSFT) completed its acquisition of the video game publisher on October 13.
The changes will be effective before the market opens on October 18.
With the big move-up, Lululemon shares rallied to their best levels since December 2021.
If you look at MarketBeat’s Lululemon Athletica chart, you’ll see that the stock has been edging higher this year, posting a 17.89% 2023 gain.
Lululemon Clothes Racing off Shelves
The company’s athleisure clothing has been running and jumping off the shelves, as the company has notched revenue increases of 18% or higher in the past eight quarters. Earnings have grown at rates ranging from 22% to 54% during that time.
You can see that growth using MarketBeat’s Lululemon Athletica earnings data.
Net income grew every year since 2017, with Wall Street eyeing earnings growth of 21% this year, to $12.17 a share. Next year that’s expected to increase by another 15% to $13.98 per share.
The company is continuing to expand its product lines, as well as its geographic footprint while maintaining a focus on the core line of clothing. The business of athletic clothing is highly competitive, with major rivals including Nike Inc. (NYSE: NKE) and Under Armour Inc. (NYSE: UAA).
Expanding Into Fast-Growing Chinese Market
Earlier this year, Lululemon said it had plans to open more than 30 stores internationally, with the majority slated for the fast-growing Chinese market, where revenue is increasing at a faster pace than in the U.S.
Net revenue increased 11% in North America and increased 52% internationally.
That doesn’t mean there are no plans for U.S. growth. For example, the company is currently building a larger space at upscale shopping area ABQ Uptown in Albuquerque, New Mexico.
Lululemon is also expanding into other lines of business, as the company demonstrated by inking a five-year deal with troubled fitness gear maker Peloton Interactive Inc. (NASDAQ: PTON).
Buying Demand from S&P 500 Inclusion
When a stock is included in the S&P 500, it often rallies due to increased demand from index-tracking funds and institutional investors.
Inclusion in this widely used index can be seen as a mark of stability, but that’s legitimate; mutual funds and exchange-traded funds tracking the S&P 500 buy shares, so that can result in a more sustained rally.
Lululemon will be part of the consumer discretionary sector, tracked by the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA: XLY).
MarketBeat’s Lululemon Athletic analyst ratings show a consensus view of “moderate buy” on the stock, with a price target of $441.93, an upside of 6.07%.
Electrical Gear Maker Also Joins Index
Lululemon isn’t the only stock being added to the S&P 500.
That’s pretty small, relative to the larger companies in the S&P 500. Organon is joining the small-cap S&P 600 index.
Hubbell, whose market capitalization is $16.31 billion, is being bumped up from the S&P 400 mid-cap index.
Within the S&P 500, Hubbell will be a component of the Industrial Select Sector SPDR Fund (NYSEARCA: XLI).
Hubbell shares rose by $3.13% on October 16, closing at $304.03 in more than double average turnover.
Industrials Move More Slowly than Retail
There are simple reasons why Hubbell didn’t skyrocket at the same rate as Lululemon: Industrials are typically slower moving, especially during economic upswings.
In addition, a maker of electrical equipment for the industrial and construction market isn’t as exciting as a fast-growing athletic clothing retailer. Wall Street analysts are susceptible to hype just like retail investors, but both sectors have their unique drivers and patterns of growth.