I’ve been pounding the table on shares of Aritzia (TSX:ATZ) for well over two years now, and while the heated clothing retail shares have already risen more than 270% in that timespan, with 72% worth of gains coming in just the past six months, questions linger as to whether it’s as overvalued as it is overbought.
Of course, the gains were even hotter a few weeks ago when ATZ stock peaked at just shy of $139 per share. While the name has since corrected by a touch over 9%, some investors may still have valuation fears, especially as the appetite for the red-hot higher-growth stocks looks to fade by a bit.
As it stands today, shares of ATZ are going for 42.6 times trailing price-to-earnings (P/E). That’s some serious multiple expansion in recent years. And while the growth profile is enough to justify the higher multiple, I don’t see a reason to be a chaser of shares right now, especially considering the stock has spent much of its trading history with a P/E multiple in the 20s.
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A premier growth retailer that’s worth paying up for. But how much is too much?
Big earnings growth is up ahead, as the relatively small $14.5 billion company seeks to expand its footprint in the lucrative U.S. market. Undoubtedly, the U.S. expansion plan is the big driver that I’ve been incredibly bullish on over the past few years. And while Aritzia may have only recently started what could be a multi-year expansion, I still think that investors should be a tad patient with the name.
Of course, a 9% dip might give late buyers an opportunity to jump in at a fairly reasonable price of admission. However, even a correction can prove nothing more than a tiny blip when we’re talking about a stock that has more than tripled in less than a two-year timespan.
In my books, that makes for a stock that’s just too hot to handle. And while I have not changed my tune on the growth narrative, which has only gotten better in recent quarters, I think investors should exercise extra caution when looking to buy at above $125 per share. I’m a fan of the brand and its potential to hit the spot in international markets, but with the firm recently eclipsing $1 billion in quarterly sales for the very first time, I’d be more inclined to take a few chips off the table right here.
Aritzia stock is getting pricey
Who knows? A broad market sell-off might take ATZ stock right back to $100, a level I’d be far more comfortable stepping in as a buyer. As for when it’s time to back up the truck, let’s say I’d be looking to the $70 level of support.
Of course, such a decline would be vicious, unforgiving, and probably related to a tough quarterly number. These days, Aritzia is showing few signs of slowing down, so investors keen on the name may wish to gradually buy their way into the stock over time on dips.
Though frothy today, I wouldn’t be against starting a very tiny position (let’s say 10 shares) with the intent of adding more if the latest 9% dip is the start of something more fierce. The stock has a history of painful pullbacks, so do be ready when better entry points arise!
