I like Under Armour Inc (NYSE:UAA) products. As a runner, they offered me another option in a market flooded with Nike Inc (NYSE:NKE) and adidas AG (ADR) (OTCMKTS:ADDYY) products. However, I’m not a fan of Under Armour stock.
The company rose to prominence last decade by offering revolutionary technology just as many Americans were jumping on two key trends. Health-consciousness has grown as a trend in the U.S., and sales continue to rise as millennials stick with their workout plans.
However, the “athleisure” clothing trend that bloomed alongside these increased workout habits has died off sharply. Yes, working out became so en vogue that even those who weren’t exercising were buying athletic gear just to look like they were.
That trend, that helped drive sales at companies like Under Armour and Lululemon Athletica Inc. (NASDAQ:LULU), has died … and good riddance. Unfortunately for Under Armour stock, Nike and Adidas caught up technology wise. Without “athleisure” to help drive sales, UAA is in trouble.
If you want a solid rundown of Under Armour stock’s fundamentals, I recommend reading Vince Martin’s recent article. In it, Vince notes, “Under Armour has to improve margins — again, the stock is trading at 71x next year’s EPS. Unless it plans on quadrupling revenue, margin expansion is necessary to get double or triple EPS — which is what’s required over time to move Under Armour stock higher.”
It’s hard to believe that after plunging last year, UAA stock is still trading at 71 times next year’s earnings. By comparison, Nike stock is trading at just 27x next year’s earnings-per-share, while Adidas is at 31x.
In light of these shortcomings, the sentiment behind Under Armour stock has plummeted. According to Thomson/First Call, 29 of the 33 analysts following UAA stock rate the shares a “hold” or worse. Meanwhile, the 12-month consensus price rests at $13.87, well below UAA’s current perch at $15.87.
What’s more, analysts are continuing to weigh in on Under Armour stock. On Friday, CFRA Research downgraded UAA to “sell” from “hold.” The ratings firm noted that nothing has changed for Under Armour stock recently, even though the shares have rebounded from their November lows:
Click to Enlarge “There has been no meaningful change in fundamentals except benefits from the tax reform that are reflected in our updated estimates. We expect further dismal sales performance in Q4 and note that UAA was the most promotional among peers during the 2017 holiday season.”
That’s a pretty harsh assessment, and indicative that while sentiment is quite bearish on UAA stock, it can get worse.
Turning to the options pits, we find an equally heavy degree of negativity. Currently, the February put/call open interest ratio comes in at a lofty reading of 1.54. This ratio has been on the rise recently, despite UAA stock’s rally.
Overall, February implieds are pricing in more than 10% for Under Armour stock ahead of expiration. This places the upper bound at $17.50, with the lower bound arriving at about $14.15.
Two Trades for UAA Stock
Put Spread: The new tax plan has provided a short-term boost for many retailers. But the added tax benefits and potential for increased consumer spending are not going to be enough to bolster Under Armour stock for long.
The company is just facing too many issues.
In other words, it’s time to fade the recent rally. Traders looking to jump on the bearish bandwagon might want to consider a Feb $12.50/$15 bear put spread.
At last check, this spread was offered at 71 cents, or $71 per pair of contracts. Breakeven lies at $14.29, while a maximum profit of $1.79, or $179 per pair of contracts — a potential return of 152% — is possible if UAA stock closes at or below $12.50 when February options expire.
Note that implieds are not pricing in a move to the $12 area. This spread is designed to lower the cost of entry, increase potential returns and lower the breakeven point compared to a standard February $15 put position, which wouldn’t hit breakeven until $14.06, near the low end of the expected move’s range.
Call Sell: Those looking for a more neutral-to-bearish play might consider looking into a Feb $20 call sell position. At last check, this call was bid at 20 cents, or $20 per contract. A sold call allows you keep the premium as long as Under Armour stock closes below $20 at expiration.
On the downside, if UAA shares rally above $20 prior to expiration, you could be forced to provide 100 shares at current market value for each call sold. This 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.
