Why It’s Time to Buy the Dip of Under Armour Stock

UAA stock has plunged over the past two weeks, and now it's time to buy the dip

When it comes to Under Armour (NYSE:UAA) stock, I’ve loved to play the contrarian for some time. And being contrarian on UAA stock has been immensely profitable over the past year.

Back in November 2018, UAA stock was flying high at $24 after the athletic apparel brand reported third- quarter numbers which easily beat average expectations. I warned that the pop was unsustainable and that the bearish thesis actually looked pretty good. By December 2018, after Under Armour had a bad Investor Day and amid a broader market selloff, UAA stock had dropped to below $17.

I recommended that investors buy the dip of UAA stock. Within a month, Under Armour stock had rebounded by more than 20%, at which point I advised investors to sell Under Armour stock. UAA stock continued to rally well after that, all the way to $28, and I kept insisting  that the rally was unsustainable.

In late July, Under Armour reported underwhelming numbers. Ever since, UAA stock has fallen off a cliff. Today, the stock trades hands at $18,  roughly where it was in late 2018.

Now it’s time to  buy the dip of Under Armour stock again. Here’s why.

Under Armour Stock Is Too Cheap

There are  three main reasons why it’s time to buy the dip of UAA stock again. The first reason is that the stock is now way too cheap.

My core thesis on Under Armour is pretty simple.: UAA is the wrong company in the right space. Under Armour is the wrong company because it hasn’t innovated or adapted to trends . Namely, the athletic apparel market has pivoted from performance apparel  to lifestyle clothes.

Under Armour hasn’t made that pivot, and as a result, it continues to launch products that – while good – aren’t as relevant as the new lifestyle products from Nike (NYSE:NKE), Lululemon (NASDAQ:LULU), and Adidas (OTCMKTS:ADDYY). That’s why Under Armour has continued to grow at a much slower pace than those peers (in Q2, for example, UAA’s constant currency revenue growth was just 3%).

Nonetheless, the athletic apparel space is the right space to be in now.  Consumers increasingly want to live active and healthy lifestyles and look like they do so. This is creating a rising tide that’s lifting all boats in the athletic apparel space, even the ugliest boats like Under Armour. That’s why Under Armour’s revenue has continued to grow, despite the company’s lack of product innovation.

This dynamic will persist. Going forward, Under Armour’s top line looks poised to rise about 5% annually , with healthy margin drivers through continued gross margin expansion and positive operating leverage. I’ve said time and time again that UAA’s earnings per share should reach $1,50 by fiscal 2025. Based on Nike’s average forward price- earnings multiple of 25, UAA stock should reach $37.50 in 2024.  Discounted back by 10% per year, that equates to a 2019 price target for UAA stock of about $23.

Thus, in late July, UAA stock was way overvalued. Now it’s way undervalued.

The Optics Will Improve

The second reason to buy the dip of Under Armour stock is that it will look more attractive over the next few months.

A big driver behind the recent selloff of Under Armour stock is President Donald Trump’s threat to impose tariffs on more Chinese imports. Ostensibly, that’s a bad thing for all athletic-apparel companies, since a bunch of athletic-apparel products are made in China. As a result, investors have indiscriminately sold athletic-apparel stocks over the past two weeks.

But Under Armour’s China exposure isn’t huge (only 10% of its products are made in China ). Further, a big chunk of these tariffs have already been delayed , yet another sign that Trump doesn’t actually want the trade war to escalate that much and is just doing some chest-puffing with the tariffs he’s already announced.

All these trade-war fears will likely cool over the next several months as they have always done after  trade-war flare-ups under Trump. This cooling will provide a lift for UAA stock.

The Stock Is Oversold

The third reason to buy the dip of Under Armour stock is that the stock is technically way oversold, and is due for a bounce-back.

The Relative Strength Index of UAA stock has dropped to 20, well into oversold territory. The last time the RSI of UAA stock was this low was back in late 2018. Under Armour stock proceeded to bottom in late 2018 and rally by more than 20% over the next month.

A similar dynamic could play out this time around. Consequently, the technicals are saying that UAA stock is near a bottom and on the verge of a nice bounce-back rally.

The Bottom Line on UAA Stock

Under Armour is the wrong company in the right space., so Under Armour stock will not be a long term winner. Instead, it’s a “buy the dip, fade the rally” stock. Right now, UAA stock is in the middle of its biggest selloff in recent memory, meaning that it’s time to start thinking about buying the shares on weakness.

As of this writing, Luke Lango was long UAA, NKE, and LULU. 


Article printed from InvestorPlace Media, https://investorplace.com/2019/08/why-its-time-to-buy-the-dip-of-under-armour-stock/.

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