Name That Trade – $UA: Protect This House

by Dan July 22, 2015 3:18 pm • Commentary

Event: Under Armour (UA) reports Q2 results tomorrow morning before the open. The options market is implying about a 7.5% one day move which is rich to the 4 qtr avg move of 6%, and very rich to the average over the last 3 quarters of 2.66% (declines of 4.8%, 40 bps and 2.6%).

Price Action / Technicals:  The stock is up 32% ytd, 17% since late may, and trading at a new all time high today.  The recent breakout above the prior high in late April puts the stock in uncharted territory, and the uptrend that has been in place since 2013 has been an immovable force:

[caption id="attachment_55558" align="aligncenter" width="600"]UA 2yr chart from Bloomberg UA 2yr chart from Bloomberg[/caption]

There is no technical resistance, but the stock should find some decent support in the low $80s at the uptrend.

Valuation: trading 83x this year, and 63x next year’s earnings the stock is one of very few $20 billion market caps with that sort of valuation.  The stock is obviously priced for perfection at a time when expansion costs seem to be weighing on earnings growth rates as consensus is calling for 13% eps growth in 2015, down from 27% last year on 24% sales growth down from 32% growth in 2014.

My View:  I don’t buy high valuation consumer stocks at all time highs, but it’s important to note that competitor NKE, which trades rich to most consumer stocks, but nowhere near UA, was also near all time highs prior to its fiscal Q4 results in late June and has since rallied 8%.  UA is a cult stock, and to try to short on valuation is a fools errand.  The stock has enjoyed a good bit of positive sentiment from the success of their sponsored basketball star Steph Curry winning the NBA championship, and golf star Jordan Spieth on a tear of late, but remember that golf apparel was only about $200 million of their $3 billion in 2014 sales.

But if your play here is for UA to pull a NKE and launch to new highs it’s best to define your risk with options due to current sentiment in the shares leading up to the potentially volatile event.  Again I wouldn’t buy the stock or options that are very expensive playing for a continuation of silliness, but I if I was long this stock I’d look to protect those shares after this run:

Hypothetical Hedge vs long shares:

Versus 100 shares of UA (90) Buy the August 85/75 put spread for 1.65

– Buy 1 Aug 85 put for 2.10

– Sell 1 Aug 75 put at .45

Rationale – Vol is sky high into the event and August vol around 40 is likely to be under 30 tomorrow afternoon, but the only reason you’re still in this stock at highs is you think it can go even higher. So being willing to sacrifice 1.65 for that privilege isn’t the worst thing in the world. This put spread protects most of the recent run in the shares and it set up to target support at the 200 day moving average near 75.