Are These Stocks too Cheap to Ignore?

Summary

In this video, Adam Coup analyzes three declining stocks—Lululemon, Duolingo, and Synopsis—assessing whether they are undervalued opportunities or short-term trades. Lululemon faces product fatigue and weaker demand, making it a candidate for short-term trades rather than long-term investment. Duolingo, despite strong financials, has a weak economic moat vulnerable to AI disruption, suitable for a short-term trade using reversal patterns. Synopsis, with a durable duopoly in chip design software, is fundamentally strong but not yet cheap enough to buy, though options strategies offer trading opportunities. Adam emphasizes the importance of economic moats, valuation, and risk-managed trading versus long-term investing.

Takeaways

• 📉 Lululemon has declined ~68% from its all-time high due to product fatigue, increased competition, and management missteps.
• 💡 The speaker previously invested in Lululemon, achieving a 59% return before selling due to concerns about its weakening economic moat.
• 🔍 Lululemon is currently undervalued according to Oracle value ($273) but is recommended only for short-term trading, not long-term investment.
• 📊 Duolingo shows strong financial growth with revenue, net income, and free cash flow improving, but its long-term moat is uncertain due to potential AI disruption.
• 📉 Duolingo’s stock recently formed a double bottom pattern, making it suitable for a short-term trade, with Oracle intrinsic value at $582 indicating undervaluation.
• 🏛️ Synopsys, in a duopoly with Cadence, has a strong economic moat and durable competitive advantage in electronic chip design.
• ⚠️ Synopsys recently dropped ~34% due to short-term issues (China trade and a major customer order cancellation) but is not cheap enough for investment yet (Oracle value $324).
• 📈 Technical analysis patterns such as double bottoms, bullish pin bars, and bear traps are key tools for identifying short-term trade opportunities.
• 💰 The speaker differentiates between investing (long-term, 'marriage') and trading (short-term, 'one-night stand'), with stop-losses and profit targets for trades.
• 🛡️ Options strategies like bull put spreads can be used to profit from stocks not yet undervalued enough to buy directly.
• 🌎 Long-term investing should focus on companies with strong economic moats and durable competitive advantages, while most stocks are better suited for short-term trading.
• 📈 Even if a stock is temporarily cheap, if its competitive advantage is deteriorating, it is not considered safe for long-term investment.

Q & A

Why has Lululemon's stock declined significantly?

Lululemon's decline is due to weak US demand, product fatigue, loss of brand appeal, increased competition, and management execution errors.

What is the presenter's stance on investing in Lululemon long-term?

The presenter does not recommend long-term investment in Lululemon because its economic moat has deteriorated, reducing its long-term competitiveness and predictability.

What trading strategy is suggested for Lululemon?

The presenter recommends short-term trading using reversal patterns like double bottoms or bear traps, setting stop-losses and profit targets based on support levels at $159 and $128.

What makes Duolingo financially attractive despite risks?

Duolingo shows strong revenue growth, profitability, increasing free cash flow, low debt, and a strong balance sheet, making it appealing for trading.

Why does the presenter not invest in Duolingo long-term?

Duolingo's economic moat is weak, making it vulnerable to disruption from AI translation tools like Google Translate or Apple's devices, which could reduce demand for language learning.

What pattern did the presenter identify in Duolingo for trading?

A double bottom pattern on daily and weekly candles indicated a potential short-term bullish reversal, prompting the presenter to enter a trade.

Why is Synopsis considered a durable investment?

Synopsis operates in a duopoly with Cadence Design, controlling the electronic chip design market, which gives it a strong and durable economic moat.

What are the short-term issues affecting Synopsis' stock price?

Short-term issues include trade-related challenges in China and a large customer, likely Intel, canceling an order. These are not considered long-term concerns by the presenter.

Why does the presenter use options trading for Synopsis?

Since Synopsis is not undervalued enough for a long-term investment, the presenter uses put credit spreads and bull put spreads to profit from stock price fluctuations without committing to full ownership.

What is the difference between the presenter's investing and trading philosophy?

Investing is long-term, focused on companies with strong economic moats, akin to a marriage. Trading is short-term, opportunistic, with stop-losses and profit targets, similar to a 'one-night stand.'

How does the presenter determine if a stock is undervalued?

The presenter uses multiple valuation methods, including the proprietary Oracle value, discounted cash flow (DCF), discounted free cash flow (DFCF), and discounted net income, with preference for the Oracle value.

What role does technical analysis play in the presenter's trading strategy?

Technical analysis, especially price action patterns like double bottoms and bear traps, is used to identify potential short-term reversals for trading entries and exits.