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Investors looking for exposure in the sports product market have plenty of opportunities. On one corner, you have large-cap growth, which is represented by Nike. On the other corner, you have mid-cap growth, which is represented by Under Armour and Lululemon. You also have small-cap growth, which is represented by emerging market stocks like Prince Mexico. Below, I review these companies and their potential.

Why Nike's Stock Has Soared

When it comes to sports brands, few companies top Nike (NYSE:NKE). The producer of sports footwear and apparel has attracted high profile athletes ranging from Lance Armstrong to Michael Jordan. These sponsorships have paid dividends, and this can be clearly seen in how the stock has essentially gone nowhere but up over the last three decades plus. In the last six months alone, it returned 25.3% to shareholders, which beat the S&P 500 by 1,765 bps.

There are several reasons why you should continue to be optimistic. First, sales were incredibly strong in both North America and online. Despite Chinese sales falling 9%, North American sales grew by 18% and margins held up better than expected with sequential expansion of 170 bps to 44.2%. The question now turns to whether or not all of this was factored into the stock price…

Is Nike A "Buy"? No!

At a respective 23.6x and 19.6x past and forward earnings, Nike comes across as fairly expensive. It is forecasted to grow EPS by a rate of 11.1% over the next 5 years, which is just 100 bps greater than what was achieved in the past 5 years. Assuming expectations are met, 2017 EPS would come out to $4.17, which, at a multiple of 18x, translates to a future stock value of a little over $75. That provides for just 6.6% average annual returns when you factor in dividend payments. In present terms, it is only worth $46.61, or a little more than three-quarters of the current valuation. Thus, Nike is all growth with no value.

Should You LUVE It? Yes!

The best sports stocks are ultimately those that are attached to (1) well-recognized brands and (2) have under-appreciated growth prospects. The distributor of Prince Tennis equipment in Mexico and South America, Prince Mexico SA (OTCPK:LUVE), just recently went public and, in my view, carries significant upside. Cleverly tickered "LUVE", as in "15-LOVE", Prince ranks as one of the most recognized sports brands alongside Wilson, Nike, and Under Armour. Prince USA has been a celebrated manufacturer of tennis products for more than four decades now.

Despite such an iconic name, Prince Mexico is valued at less than $60 million. This is remarkably small when you consider that Prince is targeting a market estimated at $4.2B. By signing exclusive licensing with Prince for distribution across Mexico, LUVE has--not "essentially" or "sort of", but has--secured a high growth market all for itself. No other companies can sell or resell the Prince brand--that means, racquets, balls, hand grips, wrist bands, you name it--across Mexico. With LUVE now expanding across South America, this upside should only increase from here, especially if products are rolled out in top retail stores.

Growth Vs. Value: Under Armour (NYSE:UA) Has Neither!

While LUVE offers considerable growth and value, Under Armour lacks both. At a respective 42.3x and 28x past and forward earnings, the stock is incredibly expensive. To its credit, it is forecasted for 21.4% annual EPS growth. However, this is a highly aggressive assumption, and, even if it proves accurate, it only implies a stock price of $58.32 by 2017. That provides investors a little more than a 3% average annual return.

I also believe Under Armour's trends are overrated. Over the last five years, free cash flow has hovered into and out of positive territory. Though FCF is at a five-year high of $150 million, this provides a yield of less than 3%. In the recent fourth quarter, revenue was also just 1.6% above expectations and yet managed to produce a 5% pop--much too high for a stock that already looks overvalued despite aggressive growth assumptions. Moreover, unlike Nike, Under Armour has been experiencing margin pressure with a sequential contraction of 130 bps. Lower margins were not just the result of higher freight costs but also the result of a weak sales mix.

Is It Time To Buy Lululemon (NASDAQ:LULU)? Mixed Bag!

During the last 6 months, Lululemon has seen its stock price decline by 13.6%. In my view, this is warranted by the uncertain fundamentals. At 39.2x past earnings, it technicality trades below the 42.7x average PE multiple over the past 5 years. In my view, this shows a degree of market delusion that will be quick to dissipate from negative earnings surprises. If Credit Agricole's downgrade of LULU from "Underperform" to "Sell" is of any indication, investors have reason to be afraid.

There are several reasons to believe that negative surprises will be in store. First, the company has experienced significant manufacturing issues that led to, for example, an undersupply of black luon pants and see-through yoga pants. And though revenue grew by 31% y-o-y, comparable sales only grew by 10% in the recent fourth quarter. Second, management has cut its outlook and is now only guiding for first-quarter comps of 5-8%. This kind of weak growth cannot support the sky-high multiple.

On the positive side, Lululemon is incredibly capital rich. It has a current ratio of 7x and no long-term debt. The company has more than $590 million worth of cash to spend, and profit margins have expanded from 11.5% in 2009 to 18.5% in 2012. Accordingly, Lululemon is like the "high margin" cousin of Under Armour. Even still, in my view, the best place to go for high returns is small-cap stocks. These stocks also have strong growth opportunities but are less discovered and thus carry a tremendous value gap. By contrast, firms like Lululemon and Under Armour are constantly touted as the "next Nike" by bulls.

Source: Should You Buy These 4 Sports Stocks?

Additional disclosure: We seek business from all of the firms in our coverage, but research covered in this note is for prospective clients, repeat or new, who may now or in the future have a position in any company mentioned herein that may be sold or increased. The distributor of this research report, Gould Partners, manages TakeoverAnalyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.