Under Armour Inc (NYSE:UAA) has risen to prominence during the past couple of years amid a health fashion trend dubbed “athleisure.” That trend died in mid-2016, with trend analysts dubbing denim “the new black.” Unfortunately for UAA stock traders, Under Armour hasn’t been able to adapt fast enough to this abrupt shift in fashion.
Like Lululemon Athletica Inc. (NASDAQ:LULU), Under Armour has been scrambling to rid itself of a glut in athletic fashion apparel and refocus its brand on its core business.
We saw what happened to LULU stock following the company’s last quarterly report, as well as the beating that UAA stock has taken during the company’s last two trips to the earnings confessional. Is there any reason to believe that the first-quarter report from Under Armour will be any different?
From a contrarian standpoint, the sentiment and technical backdrops say “No.”
Before we dive into the analysis, let’s look at the numbers Wall Street is expecting Under Armour to put up. Currently, analysts are looking for a loss of three cents per share, down from a profit of four cents per share last year.
Revenue is expected to rise a mere 5.9% to $1.11 billion. While Under Armour has yet to set a date, the company should release its first-quarter figures around the first week of May.
UAA Stock Chart
Click to Enlarge Turning to the technicals, Under Armour is down more than 30% so far in 2017, with most of those losses coming shortly after Under Armour’s last quarterly earnings release. Outside of that report, UA has been nearly pinned to the $20 region, though resistance is descending quickly into the area in the form of UAA stock’s 50-day moving average.
Despite this poor price action, analysts remain upbeat on Under Armour. According to Thomson/First Call, 13 of the 33 analysts following UAA stock rate the shares a “buy” or better. Given its poor fundamentals and technicals, I would expect a much higher degree of bearish sentiment here. But there is room for things to go south, as the 12-month consensus price target rests just overhead at $22.52, and a poor earnings showing could lead to valuation downgrades.
Options traders are also bullish on UAA stock. For instance, the May put/call ratio currently rests at 0.60, with calls nearly doubling puts among options most affected by Under Armour’s quarterly report. Overall, May options are pricing in a potential post earnings move of about 7%, placing the upper bound near $19.30 and the lower bound at $16.50.
Barring a major surprise, UA stock should remain capped by its 50-day moving average (near $19.20) after earnings, while a break below $17 could fuel even heavier losses for the shares.
2 Trades for UAA Stock
Put Spread: Poor price action and heavy bullish sentiment are hallmarks for a bearish play in contrarian investing. Lululemon already foreshadowed the trouble athletic apparel manufacturers are facing this quarter, and Under Armour is in no different a situation.
Those traders looking to bet on another post-earnings plunge from UAA stock might want to consider a May $15/$17.50 bear put spread. At last check, this spread was offered at 36 cents, or $36 per pair of contracts. Breakeven lies at $17.14, while a maximum profit of $2.14, or $214 per pair of contracts, is possible if UAA stock closes at or below $15 when May options expire.
Call Sell: Another way to profit from a poor earnings report from UAA stock is to sell out-of-the-money calls — especially if you own Under Armour. Traders taking a more neutral-to-bearish stance might consider selling the May $22.50 call. If you already own UAA stock, this call sell allows you to offset some of your portfolio losses in the event of continued stagnation, but also allows you exposure to any upside up until the stock trades at or above $22.50.
At last check, this option was bid at 31 cents, or $31 per contract. A sold call allows you keep the premium as long as UAA stock closes below $22.50 at expiration. On the downside, if the shares rally above $22.50 prior to expiration, you could be forced to provide 100 shares at current market value for each call sold, which could be quite costly if you do not have enough stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
