I don’t want to say I told you so, but I told you so. The sports apparel business is rough, and if you go about it the wrong way, you’ll get burned — taking down innocent shareholders with you. That’s exactly what happened with Under Armour Inc (NYSE:UAA).
That’s a remarkable statement considering that Under Armour is the laggard of laggards this year. It’s not even the end of the first quarter, and already UAA stock is down 30%-plus.
To put this figure into perspective, chronic underperformers GoPro Inc (NASDAQ:GPRO) and Twitter Inc (NYSE:TWTR) are actually single-digit losers. Even controversy-laden Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has a better record than Under Armour.
But it’s the comparison to the peer group that should really worry UAA stock investors. For example, specialty apparel retailer Lululemon Athletica inc. (NASDAQ:LULU) isn’t doing great with a year-to-date loss of 3%. Still, this is a very recoverable incident, requiring a 3.1% move to break even. In contrast, UAA stock must gain nearly 54% to put shareholders at parity.
The most painful comparison is against the core competition of Under Armour — Nike Inc (NYSE:NKE) and adidas AG (ADR) (OTCMKTS:ADDYY). The great ones are great for a reason. Nike is up nearly 9% YTD. Adidas is veritably destroying its rivals with a 23% leap. Say what you want about the markets not necessarily aligning with the fundamentals — you can’t explain this variance other than one is substantially worse than the other two.
Forget the Contrarian Trade
It’s not unusual that after a devastating loss like the one UAA stock has suffered, that the contrarians jump out of the woodwork. Actually, it’s fairly common. In fact, technical analyst Tyler Craig crystallized the sentiment when he wrote that Under Armour looks terrible, and that it’s time to buy!
With UAA stock offered at prices not seen since 2012, the reactionary optimism is certainly understandable. But for those that are tempted to go long without hedging, I only have one thing to say: please don’t! Under Armour got blasted for a reason, which is that their fundamentals suffered a catastrophic implosion. Any move into UAA would be largely based on pure speculation.
First off, Under Armour is a young, spirited company that has lost its spirit and youthful vigor. Annual revenue growth peaked in 2011, and has yet to match that performance. Furthermore, its last earnings report for the fourth quarter of fiscal year 2016 was a miss. That’s exceptionally rare, as UAA stock hasn’t whiffed since at least 2013.
More significantly, all of the financial talking points that made UAA such a phenomenal buy in years past now have lost their shine. For example, profitability margins, return on equity, and earnings growth are comfortably above average for global apparel makers. These metrics are a sad shell of what they once were. Additionally, Under Armour has racked up substantial debt to keep pace with its rivals.
The Problem With UAA Stock
That’s where investors should say thanks but no thanks. UAA has a major uphill battle. The top dogs of the industry are in no mood to offer a helping hand. I appreciate the fact that many athletes love the avant-garde look of Under Armour products. But for UAA stock, this type of “fandemonium” doesn’t do anything for capital valuation.
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Over the trailing six-month period, UAA stock has suffered two devastating gap-down collapses. The first one, which occurred in late October of 2016, resulted in a 13% loss. The second one, which occurred in the tail-end of January, saw a takedown of nearly 26%. Following each gap down, UAA stock has proceeded to trend bearishly.
So the contrarian gamble here is that the third time around is not the charm. But how the heck are investors supposed to know that?
The better thing to do if you absolutely must be a contrarian is to wait until UAA stock has found some stability in the markets, and not just today’s 3% pop, which could quickly erode. But I’m just throwing out hypothetical situations here. The bottom line is to avoid Under Armour shares like the plague. Maybe they’ll fix whatever needs fixing. In the meantime, keep the powder keg dry for proven winners.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
