“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, June 18, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

Option Trade – Under Armour Inc. (NYSE:UAA) PUTS

Monday, June 18, 2018

** OPTION TRADE: Buy the UAA OCT 19 2018 22.500 PUT at approximately $2.00. Place a pre-determined sell at $4.00.

Also include a protective stop loss of $0.80.

Baltimore-based athletic apparel and accessories maker Under Armour Inc. (NYSE:UAA) is among the S&P 500's best-performing stocks of 2018. It is also trading well above the average analyst price targets.

Therefore, if Wall Street price targets are any indication, UAA could be due for a pullback.

The entire athletic retail environment is heating up, but Under Armour isn't the reason why. Athleisure remains the trend in retail because brands like Nike, Adidas and Lululemon have pivoted from performance brands with niche appeal to lifestyle brands with broader appeal.

Under Armour hasn't made that pivot, and while its Project Rock shoes give them an opportunity to do so, there aren't any clear signs that Under Armour shoes are about to be commonplace off the court and off the field. (more about “Rock” below)

That is why, according to Google Trends, the popularity of Nike and Adidas has soared over the past five years, while Under Armour's popularity started plateauing in early 2016 and hasn't made a comeback since. Even amid recent Curry and Project Rock shoes catalysts, Under Armour search interest remains weak.

However, Under Armour has gained 63 percent, and is at a 45 percent premium at this point of time, but may have reached its peak.

Ari Wald, head of technical analysis at Oppenheimer, sees the biggest pullback risk in Under Armour, a stock that trades around 45 percent higher than its average price target.

"It's the one that's coming into the most amount of resistance," Wald said Thursday. "For Under Armour it's really a range of resistance. It starts at around $24 and extends up to $28."

This "formidable resistance range" should present a challenge to Under Armour in rallying higher, said Wald. This bearish gap was formed when Under Armour shares plummeted 27 percent in January 2017 following a disappointing quarterly performance and shake-ups to its C-suite.

Stacey Gilbert, market strategist at Susquehanna, shares in Wald's bearish assessment of Under Armour.

"Overall we feel like they're not going to meet fiscal year 2018 consensus, 2019 estimates are too high and eventually when investors realize what their trajectory looks like it will come back from its multiple that seems to be a bit extended here," Gilbert said.

A steep run-up in its price this year has put Under Armour's price-earnings ratio at 99.5 times forward earnings, well above a 16.6 multiple on the S&P 500.

"From an options perspective, the flow continues to be balanced so this is an exception in terms of the names on the list as well, that it's not bullish," Gilbert said.

Influencing Factors

Nike and Adidas make appearances all over Piper Jaffray's Taking Stock With Teens Spring 2018 survey as top clothing and footwear brands, but Under Armour doesn't make a single appearance – Anywhere!

From this perspective, the company's recent operational improvements shouldn't really be labeled as improvements. North America revenues are stabilizing, but the fact that there is no growth at such a small base is a big red flag for the international business. Indeed, international sales growth has cooled from up 57% a year ago to up 19% last quarter.

Under Armour is no Nike. Brand image is far weaker. Addressable market is smaller. Long-term sustainability and popularity are even bigger question marks.

But the only way Under Armour's current price tag makes sense is if the stock gets a Nike-type valuation at scale. However this will be difficult as revenue growth in North America is flat and will remain so into the foreseeable future given increased competition and lack of lifestyle appeal. International revenue growth will keep falling and eventually stabilize at an early stage, much like what happened in North America. And overall revenue growth over the next five years will average out around 5% per year.

Margins will eventually rebound, but Under Armour's reliance on lower-priced channels like Kohl's Corporation (NYSE: KSS ) to drive sales will prevent margins from regaining peak levels.

Analysts and Hedge Funds Opinions

Several equities analysts have recently commented on the company…..

  • Credit Suisse Group started coverage on Under Armour Inc Class A in a research note on Monday, March 12th. They issued a “neutral” rating and an $18.00 price objective on the stock.
  • Deutsche Bank raised Under Armour Inc Class A from a “sell” rating to a “hold” rating and cut their price objective for the company from $14.30 to $14.00 in a research note on Monday, April 23rd.
  • Canaccord Genuity reissued a “sell” rating and issued a $9.00 price objective on shares of Under Armour Inc Class A in a research note on Friday, March 16th.
  • Jefferies Financial Group reissued a “buy” rating and issued a $29.00 price objective on shares of Under Armour Inc Class A in a research note on Thursday, June 7th. They noted that the move was a valuation call.
  • Finally, ValuEngine downgraded Under Armour Inc Class A from a “hold” rating to a “sell” rating in a research note on Tuesday, March 13th.

Fifteen research analysts have rated the stock with a sell rating, fifteen have issued a hold rating, three have assigned a buy rating and one has assigned a strong buy rating to the company. The stock has an average rating of “Hold” and an average price target of $15.51.

Insider news……

Director Harvey Sanders sold 6,513 shares of the business’s stock in a transaction on Thursday, May 3rd. The stock was sold at an average price of $18.36, for a total value of $119,578.68.

Also, Director William R. Mcdermott sold 6,508 shares of the business’s stock in a transaction on Monday, May 7th. The shares were sold at an average price of $17.70, for a total value of $115,191.60.

Harvey’s Options Volatility Indicator


Under Armour's earnings are projected to sink about 5% year over year in 2018, and one negative revision has kept the stock at a Hold. Under Armour is expected to see some earnings momentum next year, with current estimates calling for adjusted profits to soar about 87% from 2018's estimated totals as the company works through its restructuring plan.

Johnson cannot help Under Armour get to the heights that many hoped the company could reach because although he and his movies may have mass appeal, his apparel and shoes are far less marketable to a wide audience.

Johnson's Under Armour successes could even be the start of a bigger overall shift back to the company's roots, which would mean that its days of chasing Nike for market share are all but over.

Under Armour Inc Class A has a 1-year low of $11.40 and a 1-year high of $24.69. The company has a market cap of $10.44 billion, a PE ratio of 122.16, a PEG ratio of 6.28 and a beta of -0.23. The company has a current ratio of 1.97, a quick ratio of 1.10 and a debt-to-equity ratio of 0.38.