Under Armour Inc (NYSE:UA) investors have been on a wild roller coaster ride in the past 18 months. They’ve seen great rallies end in tears. Year-to-date, UA stock — which issued another share class, effectively splitting the stock — is down 3% in an up-market.
It would appear that for now, UA is losing its battle with Nike Inc (NYSE:NKE) on Wall Street.
Fundamentally, UA’s management has a good reputation of on-target executions. They’ve taken the David versus Goliath attitude to prosper in an arena that was dominated by NKE. They’ve been successful at signing big names in sports like NBA star Steph Curry and Olympian Michael Phelps.
So it is relatively safe to make the assumption that whatever ails its stock is transient. Eventually, Under Armour stock should find footing from which they can remount another bull run.
Valuation could be a problem though. Compared with NKE’s 27 price-to-earnings ratio, UA’s 100 times P/E will be hurdle to overcome in its stock comeback. It’s valued higher because of its international potential. Like in the case of Netflix, Inc. (NASDAQ:NFLX), Wall Street allows for higher valuations where they see large potential growth.
But UA needs to show investors that its international plans are viable. At this point there is no need to think otherwise for UA.
Click to Enlarge Technically, UA stock is closer to its recent range lows than highs and is fast approaching critical levels that it needs to hold. If its higher lows trend is lost, it could invite incremental technical sellers.
Luckily, this level coincides with recent bounce levels that are evident on the chart. $35 per share had been prior resistance but was eventually broken through and served as a reliable bounce area. If lost, it risks becoming forward resistance once more.
UA Stock Trade
The UA Trade: Sell Jan UA $30/$27.50 credit put spread. This is a bullish trade for which I collect 25 cents per contract. In theory, this 22% buffer from current price gives me a 90% chance of success. If successful, yield is 11% on money risked.
There are more aggressive set ups for this trade. For example, if I move the trade $5 higher, I could collect more than double the premium. Selling the Jan $35/$32.50 pays 65 cents per contract. This would represent a 35% potential yield. Normally I wouldn’t mind this, but I fear that the potential technical breakdown that looms below is head-and-shoulder like in nature. If so, then loss of the bounce area could cause another 8% to 10% drop.
Also a worry is the retail sector in general. Compare NKE’s -8% 2016 performance with that of the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) +7%. The sector has been lagging and in this case, it’s not looking like it’s a candidate for a catch up trade. Conversely, if markets correct then these laggard could be sold to new lows.
I am not obliged to hold this trade through its expiration. I can close it for partial gains or losses at any time.
EDITOR’S NOTE: This story has been corrected to properly reflect Under Armour’s returns for this year, and the stock’s 2-for-1 split.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and StockTwits at @racernic.
