- Fundamentally, Netflix is the better buy when compared on an earnings growth basis.
- You can't argue locking up profits on a 66% gain in Under Armour.
- I will definitely be buying Under Armour again if I see it pull back a bit.
I recently closed my position in Under Armour Inc. (NYSE:UA) from my growth portfolio because I felt that I had a pretty good profit at the time. I ended up buying shares of Netflix, Inc. (NASDAQ:NFLX) because I've been using it as a trading vehicle whenever I feel there is positive momentum in the name. Netflix provides an Internet television network. The company has three operating segments: Domestic streaming, International streaming and Domestic DVD. On July 21, 2014, the company reported second quarter earnings of $1.15 per share, which was in-line with analysts' estimates. In the past year, the company's stock is up 82.35% and is beating the S&P 500 (NYSEARCA:SPY), which has gained 20.32% in the same time frame. I initiated my position in Netflix on August 12, 2014.
I sold my shares in Under Armour because I wanted to lock in some profits in the portfolio. Under Armour Inc. is engaged in the development, marketing, and distribution of apparel, footwear, and accessories for men, women, and kids. On July 24, 2014, the company reported second quarter earnings of $0.08 per share, which beat the analysts' estimates by $0.01. In the past year, the stock is up 101.48% and is beating the S&P 500, which has gained 20.32% in the same time frame. Let's now take a look at both stocks on a fundamental and financial basis.
Some investors like to look at the trailing twelve-month P/E ratio because it tells them how the stock is valued with respect to earnings, which were actually earned. I mainly like to look at the forward year P/E ratio to get an idea if earnings for the coming year are about to increase or decrease. I don't like paying more for a company's future earnings than what I was paying for the previous year because it indicates that the earnings for the coming year are going to be less than the previous year. A reduced future year earnings indicates either a reduction in revenues or major expenses are being incurred.
I also like to look at the 1-year PEG ratio. This metric is the trailing twelve-month P/E ratio divided by the anticipated growth rate for a specific amount of time. This ratio is used to determine how much an individual is paying with respect to the growth prospects of the company. Traditionally the PEG ratio used by analysts is the five-year estimated growth rate, however I like to use the one-year growth rate. This is because as a capital projects manager who performs strategy planning for the research and development division of a large-cap biotech company, I noticed that 100% of people cannot forecast their needs beyond one year. Even within that one year, things can change dramatically. I put much more faith in a one-year forecast as opposed to a five-year forecast. The PEG ratio some say provides a better picture of the value of a company when compared to the P/E ratio alone.
An additional value I like to look at is the earnings per share growth for the coming year. This metric is really simple, it is essentially taking the difference of next year's projected earnings and comparing it against the current year's earnings. The higher the value the better prospects the company has. I generally like to see earnings growth rates of greater than 11%. Again, in this situation I like to take a look at the one-year earnings growth projection opposed to the five-year projection based on what I discussed in the PEG section above.
Let's take a look at how Under Armour and Netflix stack up against each other on a fundamental basis in the table below.
EPS Next YR ($)
Target Price ($)
EPS next YR (%)
Because both stocks are considered growth stocks due to their extremely high earnings growth expectations one would anticipate their earnings valuations to be expensive. As we can see from the table above, both Under Armour and Netflix are expensive on trailing earnings (I consider a P/E value above 30 to be expensive). Additionally, on future earnings both companies are also expensive. But because both stocks have different growth profiles it's important to measure the PEG ratio. By looking at the PEG ratio I believe that both stocks are expensively valued, but with Netflix being a better value with respect to growth rate. Hence, on a fundamental basis, I believe Netflix to be the better stock.
On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. In my growth portfolio however, I will forego the dividend aspect of the financials if a company doesn't pay one. Return on assets is the metric, which shows how profitable a company is relative to its total assets, telling us how efficient a management team is at using its assets to generate earnings. It is best to compare ROA values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. The assets of a company are comprised of both debt and equity. The higher the ROA value, the better, because the company is earning more money on less investment.
Return on equity is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry. It is best to compare ROE values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. Equity is determined as the net income for the full fiscal year before dividends paid to common stock holders but after dividends to preferred stock, but does not include preferred shares. The higher the ROE value, the better.
ROI is an important financial metric because it evaluates the efficiency of an investment that a company makes and if an investment doesn't have a positive ROI, then the investment should not be made. It is calculated by dividing the difference of cost of investment from gain from investment by cost of investment. It is best to compare ROI values of companies within the same industry as it is industry dependent, but for the purposes of this tournament, I will not be utilizing that rule of thumb. The higher the ROI value the better.
Let's take a look at how Netflix and Under Armour stack up against each other on a financial basis in the table below. As we can see from the table, Under Armour is definitely the better financial manager of the two as it beats Netflix on all financial metrics I look for in a company.
Payout TTM (%)
I sold Under Armour for a 66.84% gain or 68.52% on an annualized basis. Again, I only sold Under Armour because it made me a great gain and I wanted to lock up some profits. Under Armour is a very excellent company with great near- and long-term earnings growth expectations, but is expensively valued based on 2015 earnings estimates.
Under Armour's future growth potential consists of being able to distribute their athletic apparel globally and eat up market share from athletic apparel behemoth, Nike (NYSE:NKE). Netflix's future growth potential consists of being able to generate more of its proprietary content, sign additional content distribution deals with content makers, and continued expansion around the globe. I don't believe the global economic growth right now is what it's made out to be. I do believe that the consumer may start to tighten its belt and it may actually help Netflix. I believe that people are going to stay away from going to the movies and dinner to stay in and watch Netflix while having a home-cooked meal. It's for these reasons I'm monitoring Netflix and may jump back into it.
Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!