It’s looking like overtime for Under Armour Inc (UA) bulls as the bears are challenging with their own full-court press.
There’s nothing wrong with Under Armour. It continues to make its mark as a terrific athletics brand that’s on the move. But following earnings from a couple weeks back, UA stock remains expensive and vulnerable to a larger price correction.
Regarding Under Armour’s recent report, the company managed to top profit forecasts by a penny on earnings of 45 cents per share for growth of 9.7% compared to last year’s score of 41 cents.
That’s the good news.
On the other hand — and what has been par for the course — is that UA stock is very richly priced.
Shares of UA stock trade at a forward price-to-earnings ratio of 70 and maintain a five-year expected PEG ratio of nearly 4.0 and price-to-sales of 5.62.
And you thought the S&P 500 was expensive!
And when measured against other athletics and/or lifestyle retailers like Nike (NKE), Adidas (ADDYY), Columbian Sportswear (COLM), Lululemon, (LULU) and Skechers (SKX), nearly every comparison points to UA stock as a pricey proposition.
At the end of the day, we get being fans of Under Armour and buying into the UA story and brand — but just don’t buy UA stock right now.
UA Stock Daily Chart
The technical case for heeding caution had largely to do with UA stock’s unobstructed and lofty base count of six weekly bases. The extremely high base count reflected a situation of a nearly three-year run higher in UA stock without shares undercutting the lows of a prior base.
Extended base counts are good while it lasts. But the same overconfident price action generally becomes, at some point, its own worst enemy. And as third and fourth bases are generally worth being much more cautious, a count of six, as with UA stock, grows increasingly bearish for the bullish trend.
To a certain extent, that’s exactly how UA stock played out a couple weeks back with earnings (unsurprisingly) acting as the catalyst, for profit-taking. But, we don’t think the downside is over just yet for UA stock either.
In the here and now of the Under Armour earnings aftermath, a breakdown from a symmetrical triangle has resulted in shares rebounding in the shape of a bearish flag with UA’s 50-day simple moving average acting as overhead resistance.
That’s good news for bears looking to enter short in UA stock, but what’s the downside objective look like?
It’s part of the game for growth stocks like Under Armour stock to see price corrections of up to 30% in healthy market environments after delivering strong gains. Further, as UA stock has failed to test bullish investors like that in more than a few years, it wouldn’t be surprising to us if a correction of that magnitude, down to $74, were to occur.
At a minimum, I’d expect a corrective test of 25% down to $80. A price move down to that level would effectively reset the base count as the action undercut’s the Aug. 24 mini-flash crash low and what resulted in a flimsy, sixth-base V-bottom.
UA Stock Bear Put Spread
Given the discussed expectations for a 25%-30% corrective move in UA stock, one spread which fits in nicely is the Dec $92.5 / $85 bear put spread.
With UA stock near $96 a share, this bearish vertical trades for $1.80 per spread. A trader’s risk is limited to the initial debit, which along with reducing other undesirable Greeks such as time decay is a huge benefit of using a bear put spread.
Traders also might consider a technical stop-loss to further manage risk. For instance, a stop at $99 in UA stock is above the 50-day simple moving average and would break the bearish flag pattern.
Not only are those sufficient technical reasons to exit the position, but if the stop were used in the next couple weeks, the trader could reasonably expect to reduce risk by about 50% to 60%.
Looking downfield in UA stock, if shares were to move below $85 by December expiration and still several percentage points above our 25% correction level, the spread would expand to $7.50 and net the trader $5.70 in profits.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
More From InvestorPlace
- Chipotle Mexican Grill, Inc.: CMG Stock Is Begging to Bounce
- Monday’s Vital Data: AAPL, BAC and BABA
- Berkshire Hathaway: Earnings DOUBLE, Revs Miss (BRK)