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This Retailer Stock's 'Hyper Growth' Could Bring 23% Gains

Friday, June 27, 2014 - 4:00pm

Trading stocks is a fast business. One great earnings report, a big product announcement, or a high-profile analyst upgrade can send a stock soaring -- and fast. The latter catalyst occurred this week for flash-sales e-tailer Zulily (NASDAQ: ZU).

Shares spiked 9% on Wednesday after Goldman Sachs (NYSE: GS) upgraded the stock to "buy" from "neutral." The highly respected brokerage firm also raised its price target to $50 from $47, which is 24% higher than current prices.

According to Goldman, the upgrade is based on what the brokerage firm calls the company's "hyper growth" potential. So, what does Goldman consider "hyper growth"?

Goldman wrote that it expects the retailer, created to sell children's apparel and accessories to moms who shop for deals online, will eclipse the $1 billion sales milestone this year. That feat would indeed be significant, especially considering the company has only been around for the past five years.

"If achieved, [Zulily] will join the company of Amazon (NASDAQ: AMZN) and Old Navy as the fastest retailers to reach this key milestone," Goldman analysts wrote in their report.

That's high praise indeed, and extremely impressive for a retailer that does things much differently than either Amazon of Old Navy. In fact, Zulily is a company that's been described as a disruptive force in the retail landscape, and particularly in the children's apparel segment.

The reason why it's so disruptive, and the reason for the likelihood of "hyper growth," is because of Zulily's unusual inventory model. According to Goldman, the Zulily flash sale business model allows for much more "agile merchandising." That means less wasted inventory and a much more streamlined retail operation than that of its rivals, such as traditional kids' apparel retailer Carter's (NYSE: CRI).

Goldman analysts didn't seem shy about assessing the current prospects for ZU shares here after the huge sell-off from late February through early May. During that time, shares cratered more than 60% from a high of $73.50 to a low of $28.75.

They write, "With the recent pullback, we see a good entry point as the company expands its merchandising, fulfillment and marketing initiatives, which we expect to drive higher-than-expected customer growth into 2015." The report added, "We view [Zulily's] aggressive pricing strategy as core to continued share gains in both kids and non-kids categories."

As you can see in the chart below, ZU shares have been volatile since their November 2013 IPO. Thanks to the Goldman bump and follow through buying on Thursday, they are now trading back above their 50-day moving average for the first time in almost three months, a bullish sign for the stock going forward.

However, the real bullish driver for ZU will be whether traders embrace Goldman's line of thinking and if the company lives up to hyper-growth forecasts when it reports earnings in early August. I expect it will and that the stock could achieve Goldman's $50 target in the next two to three months.

Action to Take -->

-- Buy ZU at the market price
-- Set stop-loss 8% below entry price
-- Set initial price target at $50 for a potential 24% gain in the 2-3 months

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'Hyper Growth' Could Send This Disruptive Retailer Rocketing Higher

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Jim Woods does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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