I’ve long been bearish on Under Armour Inc (NYSE:UA,NYSE:UAA), and for the most part I was justified in my pessimism. Since the final quarter of 2015, Under Armour stock personified the unmitigated disaster. As I previously warned, UA kept falling and falling. Still, I will give credit where it’s due: the sports apparel maker is so far the surprise hit of 2018.
How else can you explain this company’s incredible resilience against so many broader headwinds? Year-to-date, Under Armour stock is up almost 23%. It’s a far cry from last year when UAA lost slightly more than half its market value. More importantly, the embattled firm is significantly higher than its main rival Nike Inc (NYSE:NKE), which is up 9% YTD.
Additionally, UAA stock is just slightly behind industry powerhouse adidas AG (ADR) (OTCMKTS:ADDYY). That said, UAA likely has superior upside potential. Increased options market volume for the May 19 calls suggests robust bullishness in the nearer-term. If you want to pick up some quick and easy profits, this trade might do the trick.
Furthermore, Under Armour stock is undoubtedly a contrarian favorite. Its fortunes in the market have been ugly for years, so many investors expect a relief rally.
But I’m not just speaking about technical speculation. As our own Larry Ramer discussed, UA has performed exceptionally well in China. Furthermore, they have pumped out innovative products, such as the HOVR smart running shoes. Potentially, this could steal away fitness product market share from companies like Apple Inc. (NASDAQ:AAPL).
Finally, UAA hired Patrik Frisk as president last year. As Ramer noted, Frisk has impressive credentials, most notably turning around the Timberland brand.
If you want to gamble, Under Armour stock has potential. For everyone else, here are three reasons to stay away:
The China Factor Is Overplayed
If you’re thinking about rushing into UAA stock because of China’s exploding middle class, I urge caution. I’ve seen so many investment stories related to the China factor, but I believe it’s an overplayed argument.
For starters, InvestorPlace feature writer James Brumley hit the nail on the head: “North America still accounts for more than three-fourths of the company’s business, while Asia still contributes less than 10% of the top line.” If Chinese sales are going to push Under Armour stock higher, they have to be much higher than they are.
Also, Brumley warns:
Throw in the fact that China just dealt its first (new) blow in a trade war by imposing some tariffs on select products made in the United States (only food, so far, but the war could escalate) and what you’ve got is a truckload of uncertainty about a group of consumers that aren’t unwilling to boycott American brands in support of their nation.
More important, most of the Chinese middle class growth has occurred in the lower middle-income bracket. Currently, three-fourths of the nation’s middle class is in the lower echelons of this category. These folks simply don’t have the discretionary income to buy smart shoes without a care.
Under Armour Stock Has Underwhelming Fundamentals
Let me point out a future conundrum: many Under Armour products are made in China. If the Chinese middle class grows in both numbers and wages, they’ll be able to buy more stuff. The problem though is who would then work in low-wage sweatshops?
That issue is a little bit further down the line. Nevertheless, it points to an issue that’s plaguing Under Armour stock right now: its fundamentals are underwhelming at best.
As I’ve argued in the past, Under Armour is the relative new kid on the block. If UAA stock is to compete for investor dollars against behemoths Nike and adidas, management has to be smart. But their debt has ballooned in recent years because it wants to trade shots with the big boys by endorsing big boy players and teams.
Lightweights should never box heavyweights: just look at the long-term chart for Under Armour stock to see why.
Frisk Is a Big Question Mark for UAA Stock
I’m going to go contrarian on a contrarian stock. Frisk is an excellent leader but Under Armour is an altogether different challenge.
Analysts love to play up Frisk’s role in reversing Timberland’s fortunes, but I have to ask: what did he actually do? Yes, this question sounds blasphemous considering the results, but let’s put the reversal in context.
Timberland’s president cited “consumer target” identification as pivotal to the turnaround. If so, I don’t find Frisk’s involvement that impressive. This sounds like something overpaid executives say to “create synergy,” or some other corporate drivel.
Plus, this explanation overlooks the obvious catalyst. VF Corp (NYSE:VFC) bought Timberland in 2011, and injected it with resources it never had before.
Here’s the big problem for UAA stock: management knows exactly who their “consumer target” is, which is everybody that buys Nike or adidas. Additionally, they need to challenge these alpha dogs by cutting costs while still sparking innovations and motivating workers.
I’m sorry folks, but the easy money (ie. contrarian speculation) has largely been made. Moving forward, Under Armour stock has to grind against some of the biggest brands in the world. That’s just not a great recipe for success.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.