Finanzas: Under Armour Update: 2017 Underperformance Imminent
One of the stock market’s trending stories of 2016 would have to be Athleisure momentum fading, which we identified last spring as performance destabilizers for both Under Armour (NYSE:UAA) and Nike (NYSE:NKE). As Under Armour attempts broadening its brand worldwide, competition from the likes of Nike and Adidas (OTCQX:ADDYY) stiffen, and what was once a hot sector starts looking like a bad neighborhood. Under Armour’s place in this neighborhood remains strong, and growing, but every story takes a pause, and 2017 sets up to be another year of underperformance for the stock.
Quickly looking at UAA on the chart (red-line), compared to NKE (blue-line), shows how vastly both underperformed the index (NYSEARCA:SPY), and how closely the stock prices mimic one another other. The correlation is uncanny, and skepticism for the sector is high.
Nike operates on a much larger global scale, and dollar strength puts the company at a disadvantage when competing with the likes of German-based Adidas. Under Armour retains most of its earnings state-side, but with currency costs rising, and razor thin margins, the company can’t afford the same world reach as Nike, or Adidas. Growth isn’t what it used to be at UA, and management expressed this fact in the earnings call last October.
Boom went the stock, down as much as 18% during the call, as valuation clashed with reality, and another quarter of bag holders left wondering what happened to that amazing growth story. Sales growth remains strong at UA, but not at levels justifying 44x next year’s earnings, which could shift with the seasons. As with most hot stocks, the hyper-growth period of the story recedes, and comparable quarters, and years, get harder and harder to beat.
Under Armour Vs. Nike: No returns, please exit with your bag.
Often analysts compare UA to Nike, and the former usually gets the nod as the King of Sneakers. Under Armour is a hip brand, and I wear and love the gear, and the company’s growth rates remain phenomenal on the downward slope. However, when it comes to shareholder-friendly management, Nike wins hands down.
Obviously growth numbers for UA have started to slip, but Nike dominates in terms of effective management with great returns on assets, equity, and investments. Margins also go the way of Nike, and this has everything to do with experience. UA does a lot of things right, and the company executes as advertised as far as growing the brand. Expenses, margins, and shareholder value, however, seem lost in the shuffle, and those less-than-stellar efforts get reflected in UA’s share price.
Under Armour (NYSE:UA) Vs. Under Armour
Add the insider-selling Class A/C share debacle of 2016, then you get a great brand whose stock resides in bear territory and with underperformance written all over its face. The outlook for UA Class A or UA Class C remains the same, and whether or not you vote in shareholder games, UA still stands for Under Armour, and Kevin Plank still sold so many millions of shares for votes. The only difference, or perceived advantage, we can gauge is that short-sellers should always target the higher-priced of the two, and see whether or not one attracts the other, like falling celestial bodies afire in the galaxy.
Rather than try and color the chart with arrows and quotes, methinks readers can point to exactly the last time Under Armour reported earnings, and since that time the stock continues disappointing bulls on its way towards new, multi-year lows. The stock sits below every relative moving average, and fundamentals point to lower prices regardless of growth, or new Tom Brady-endorsed sleep-easy pajamas, which in all honesty, I am eager to try.
Back in June (2016) we made some bold calls: Under Armour: Curry Wins! Sell The News. We all know what happened next. Stephen Curry and the Golden State Warriors did not win the NBA title despite leading the series 3-games-to-1, and we got that part of the story wrong. The article presented a compelling short slash bear thesis, and identified headwinds facing Under Armour like margins, inventories, and endorsement spending. We did initiate short positions in UA, now UAA, via various puts on pops throughout the summer, which have been rolled out with profits trimmed along the way. However, no reason presents itself as to cover the position completely, but rather add on this particular false promise until a break in the downtrend can be detected. Fundamentals, and sentiment, do not support the stock at these levels.
The brand, however, is hard to bet against, and Under Armour might be a good investment for the future if you are the kind of investor who likes to put things under your pillow and forget about them. In looking at the numbers: the company’s struggles with growing pains coupled with mad spending habits might keep the stock grounded for years. Every move the company made in 2016 seemed like such a slap in the face to shareholders, and the stock price suffered appropriately. In 2017, comparable growth rates will be tough to beat, or meet, as the company already guided down last October (2016). Under Armour, both tickers, report earnings on January 24th before the market opens, and expectations are mixed for the entire space, including Nike. A trade to consider or hedge with a short UA position would be long NKE via options or the stock. If UA, or UAA, whatever your preference is, rallies into this event, then look for your chance to fade the stock. Otherwise put it under your pillow and forget about it as you get into those new sleep-easy pajamas.
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