Shares of Under Armour Inc (UA) were down as much as 3% on Tuesday, despite a lack of market-moving news. Perhaps investors found themselves wondering whether they’d rather own UA or its biggest rival, Nike Inc (NKE), which reports earnings after the bell Tuesday.
Wall Street expects NKE, the world’s largest apparel company to earn 86 cents a share, up 16% from last year, on $7.81 billion in revenue, which is up 5.8% from the year-ago quarter.
Under Armour’s growth is far more exciting than Nike’s. Analysts covering UA stock expect the company to grow revenues by 26.2% this quarter and see advance per-share earnings nearly 18%.
That said, Tuesday’s pre-NKE earnings move serves as another clear sign that Under Armour’s valuation — the stock trades for 57 times forward earnings — has outpaced its growth. The UA stock price was up more than 50% at one point this year, but now sits on YTD gains around 16%.
Here are a few reasons I expect UA stock will underperform in the near-term — and thus why you should sell now and buy back in at a more favorable price later.
UA Stock Moving Irrationally
In a piece I wrote on Oct. 20 (UA Stock: NOT For the Faint of Heart Before Q3 Earnings), I noted that shares, then trading for $100/share, looked rather expensive. I recommended staying on the sideline, and not buying UA stock before Q3 earnings two days later.
Two days later, Under Armour reported fabulous results, logging its first-ever $1 billion quarter and beating on both EPS and revenue. It had beaten revenue expectations for an incredible 27 straight quarters. Then something strange happened: UA stock plunged, losing 8%.
When stocks start to sell off after exceeding all expectations, that’s a good sign the shares are trading irrationally and that you should take your leave since there’s no longer a method to the madness. I advised investors to do just that, and they’d be better off today if they’d ditched UA stock then.
Today, two months later, I still think you should sell Under Armour stock, especially if you like to gear your portfolio toward short-term trades.
Not only is UA stock a mess from a valuation perspective, it’s technicals are starting to look rotten, too. It’s 50-day moving average (blue line) is quickly converging on the 200-day moving average (red line); if those two eventually cross, and I suspect they will soon, technical traders will sell the living bejesus outta this thing, and maybe even start shorting it.
Aside from all that, analyst Erinn Murphy of Piper Jaffray recently lowered her price target on Under Armour stock due to high levels of inventory going into the holidays. That usually means retailers are forced to heavily discount merchandise to move it off their shelves, and that’s precisely what UA did during the peak holiday shopping season.
Conversely, Murphy noted that wearable devices company Fitbit (FIT) was being anti-promotional, a sign of strong demand and appropriate inventory levels.
As I’ve said before, I like Under Armour the company. But I think the stock is dramatically overbought, and the market seems to be realizing it. Don’t wait on this one to rebound — it may take a few years.
As of this writing, John Divine was long FIT stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
