Apparently, Under Armour Inc (NYSE:UAA) is doing better than I expected. Driven by pretty solid growth overseas, the company topped first-quarter earnings expectations last month, sending UAA stock skipping sharply higher immediately following Under Armour’s quarterly report.
Despite the knee-jerk reaction, sales still declined year-over-year stateside, and Under Armour still posted its first net loss in a decade. And it seems that UAA traders are already coming to grips with this reality.
After spiking to $22 per share in reaction to earnings, UAA stock has fallen more than 7.4% — nearly filling in its post-earnings gap higher.
Shares are likely to find support in the $20 region, and even rebound to test $22 once again as the earnings euphoria lingers on for a bit. But, without another significant driver on the horizon, UAA could be stuck in another consolidation period, or worse, dip back below $20 and suffer additional losses.
Sentiment and Options
Sentiment has changed very little since I last checked in on Under Armour stock ahead of earnings. The shares have picked up a “buy” rating, with nine of the 33 analysts following the shares no in the bullish column, according to Thomson/First Call.
However, the 12-month consensus price target has come down from its pre-earnings perch at $22.35 to rest at $21.26 — a hair’s breadth above the stock’s current perch. With losses still in the air, look for valuation concerns to potentially drive a downgrade or two in the coming months.
Meanwhile, Under Armour’s rejection at $22 appears to have emboldened short sellers. As of the most recent reporting period, the number of UAA shares sold short has risen 4% 48.8 million, or 13.6% of its total float. Should short selling gain momentum, support at $20 could be in danger of falling.
Options traders also continue to lean bearish on UAA stock.
Currently, the June put/call open interest ratio rests at 0.99, with calls and puts in near parity. Peak put OI totals 1,900 contracts at the $20 strike, while peak call OI for June numbers 2,600 contracts at the overhead $22.50 strike. Overall, June implieds are pricing in a nearly 8% move for UAA stock ahead of expiration. This places the upper bound at $22.13, with the lower bound arriving at $18.87.
2 Trades for UAA Stock
Put Spread: While my prior suggestion for a May $17.50/$19 put spread is likely a bust at this point — barring any major developments — a continued drift lower from UAA stock would make a Jun $17.50/$20 bear put spread quite attractive.
At last check, this spread was offered at 50 cents, or $50 per pair of contracts. Breakeven lies at $19.50, while a maximum profit of $2.00, or $200 per pair of contracts, is possible if UAA stock closes at or below $17.50 when June options expire.
Call Sell: The May $22.50 call sell I suggested last month is going strong and should still finish out of the money. If you’re looking for back-month exposure, the same strike should do well in the June series as well.
At last check, the Jun $22.50 call was bid at 21 cents, or $21 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.
