Under Armour has been an astonishing growth story with great products, ballsy management, and a surging brand thanks to attractive endorsers, but the stock has been in a serious funk since its all time highs made in late September, now down about 30%. The stock is getting drilled today as Morgan Stanley stated that the company is LOSING market share for the first time in years. It had been a net taker for the past few years. From Bloomberg:
Under Armour is seeing decling share in women’s apparel, lower ASPs in footwear, Morgan Stanley analyst Jay Sole writes in note, citing recent SportScan data. N-T earnings uncertainty more than just weather-related; first time in 3 yrs UA losing shr in apparel. UA may be reaching maturity in U.S. apparel faster than previously thought; shrs aren’t priced for U.S. slowdown. Cuts to underweight from equal weight, PT to street-low $62 from $103
In 2015, earnings growth decelerated massively to about 10%, from the prior two year’s 25% growth. The stock trades 68x trailing and 53x forward earnings. I guess the issue about forward is that consensus is still calling for 29% earnings growth in 2016, which would be its highest since 2012. The year to date price action, down about 14% suggests that investors are re-pricing the potential that the for eps growth that looks a bit more like 2015.
Despite the stock being solidly in bear market territory, blasting through technical support at $70, with little support until the mid $60s, with the potential on a break to fill in the mid 2014 earnings gap at $60:
Bullish? Here’s a way to define levels:
For those looking to leg into a long position on weakness, out of the money put sales could be attractive given the elevated levels of implied volatility (the price of options). Thirty day at the money implied volatility is at 53%, at new 52 week highs, well above realized vol (how much the stock is moving) at about 35%:[caption id="attachment_60116" align="aligncenter" width="600"] UA 30 day atm IV (blue) vs 30 day realized vol (white) from Bloomberg[/caption]
An existing long interested in dollar cost averaging, or looking to add yield and willing to buy much lower could sell out of the money puts in February. For instance, with the stock at $68.75, the Feb 19th 60 put can be sold at $1.50 or about 2% of the underlying stock price. If the stock is above $60 on February expiration then you would take in the $1.60 in premium. If the stock were below $60 on February expiration you would be put the stock (100 shares per 1 contract) and have losses below $58.40 (strike price less premium received), down about 15.5%.
The risk to this trade is obviously a massive gap lower, which could occur when the company reports Q4 results on January 28th. The one day implied earnings move is already approaching its 10 year average one day post earnings move of 7.5%.
Is this strategy preferable for those looking (who aren’t already long) to get in the stock on weakness? Only if it’s part of a strategy. A long call or (preferably) a call spread should be added to the short put in order to participate on the upside. Using the same put sale of the Feb 60’s at 1.60, the Feb 75/85 call spread can be bought for 1.60, creating 10 dollars of opportunity on the upside. The risk is the same because the put sale is the same but the trade assumes that one would want to own UA below, but this trade gives room in case the entry isn’t exact. Gains above $75 would be identical to stock on Feb expiration (until $85)
THESE ARE NOT A TRADES WE ARE DOING, AS THE STOCK IS IN THE THROES OF A NASTY UNWIND, IN A NASTY MARKET WITH AN IMPENDING EVENT. WE SEE NO REASON TO ATTEMPT TO CATCH A FALLING KNIFE.
BUT WE DETAIL THE STRATEGY FOR TRUE UA BELIEVERS.