Under Armour's Drop And Bounce: 3 Lessons From The Egg I Just Wiped Off My Face

| About: Under Armour, (UA)

Summary

I recommended buying UA too high; it fell roughly 30% driven largely by fears of warm weather and a dramatic downgrade by Morgan Stanley.

However, the decline appears based on PE and sentiment; the recent earnings report showed zero change to the company’s fundamentals.

Investors should walk away from these past few months with three key lessons.

Near-term I expect the stock to stabilize in the $80s-90s, but remain aware of market volatility and likely turbulence.

I have written about Under Armour (NYSE:UA) a few times, and remain bullish on the stock. However, the past couple months, I have had egg on my face as the stock fell from over $100 to under $68 a share.

While others may argue differently, I perceived its fall came about not because of any earnings report or change to guidance, but simply on negative sentiment and overall market trends…as well as fear - more on that to follow. But that changed yesterday, as UA announced its earnings and proved that the fundamentals have not changed, thus providing the stock a 22% rise. For the past several weeks, I refrained from writing anything on UA for two reasons:

1. The sentiment had turned bearish and every time a bullish article was published, the stock seemed to fall further. Anything I wrote with a bullish theme would likely be futile until the ER.

2. I had nothing to add - investors had no new facts or earnings guidance; only analyst and author assumptions regarding future performance with a few channel check reports that proved less than accurate - detailed here by Stone Fox.

Before I dissect these two a bit further, I want to say congratulations to the bears and all of those who provided me with feedback about the stock being too pricey. I have no sour grapes here and you all did well during this decline. And for the longs, if you were like me, you bought more at lower prices and are happy with the end result.

But, and you knew there had to be a "but," while your bear opinions of a price decline were correct, the only valid argument I could perceive was a high PE ahead of itself that slicked the wheels for a drop as sentiment for UA fell with a general market decline. Other arguments focused on growth, fear of warm weather impacting sales, and other fundamentals were all simply assumptions…and Samuel Jackson can tell you a little about assumptions if you watch The Long Kiss Goodnight (Google it if you are unaware of the scene, but warning - it has crude language). Bears were right in assessing the price would fall, but it fell in line with the stars as the markets became volatile, Morgan Stanley issued what I can only deem a classic "buy high, sell low" recommendation based on a "report" that omitted several areas of UA's business, and investors began to over-hype the impact of the weather.

While I was wrong in the near-term, the UA picture remains bright as footwear and international sales continue to soar, and even domestic and online sales are chugging along without issue. However, regardless of your position, investors should walk away from UA's past 90 days with three key lessons that apply to any investing strategy in high growth stock.

Lesson 1: With high PE ratio stocks, intestinal fortitude is key

Benjamin Graham has two quotes that coincide with growth stock investing. The first is:

"Unusually rapid growth cannot keep up forever; when a company has already registered a brilliant expansion, its very increase in size makes a repetition of its achievement more difficult."

While this statement is true - look at Michael Kors (NYSE:KORS) for a good example - it does create difficulty in determining when that growth will slow and how to properly value high growth stocks - UA is a prime example of this dilemma as it continues to outperform expectations. The high PE and eventual growth decline argument has been used for ten-plus years and left many investors in the dust as UA continues to advance. But in the same breath, stocks like GoPro (NASDAQ:GPRO) and any of the recently IPO'd restaurant were over-hyped and have shown the music eventually stops, thus leaving investors holding the bag. I would argue this comes down to knowing your company's long-term growth vision and its long game, which coincide with Graham's second quote.

"A price decline is of no real importance to the bona fide investor unless it is either very substantial-say, more than a third from cost-or unless it reflects a known deterioration of consequence in the company's position. In a well-defined bear market many sound common stocks sell temporarily at extraordinary low prices. It is possible that the investor may then have a paper loss of fully 50 per cent on some of his holdings, without any convincing indication that the underlying values have been permanently affected."

Investors need to be willing to withstand some loss on a stock and continue to invest as long as the long-term story remains unchanged. Again, UA fits this example. Has the long-term vision changed? No. Was the recent performance abnormal outside what one would expect of a maturing athletic apparel company? No. And lastly, if it was worth continuing to hold and/or buy at a PE of 100-plus, would it not be prudent to buy more as that PE shrinks because Mr. Market, not the fundamentals, has implemented such a decline? Yes.

Remember that when you buy something like UA, it is not PG or UL or CL; it is a high PE stock that is going to see some bumps in the road; however, it requires looking at your map constantly to ensure you are still on the right highway and checking accurate traffic reports to ensure the road is not going to be closed.

Lesson 2: Be a bear or a bull, but don't be a pig

A legacy quote, but no matter how many times we hear it, investors still often fail to follow its simplicity and get slaughtered. If you shorted UA at 100-plus, you were looking marvelous before the UA report. At over a 30% decline, exiting the position or the purchase of a few hedging calls would have likely been prudent, and hopefully many of you did so. If you did not, then you saw your profits and put premiums disappear overnight (you still made money, just significantly less money).

On the opposite spectrum, kudos to those who sold at 100-plus and waited for a new entry point. I was being a bullish pig and the stock got ahead of itself. Of course, being a pig on the bull side of UA has often resulted in unrealized gains as the stock rides higher and higher. If I had been in such a position with a sizable gain, especially with hundreds or thousands of shares and sold at the high, I probably would have considered some LEAP options. This would have been cheaper way with less risk to still see some long-term gains even after selling shares. A good technique to remain a bull, but not a pig

Remember to reassess your position and consider exiting when your profit is sizable - on a personal note, my $95 April Calls were up over 30% about 60 days ago; I was a pig…now I play the waiting game and hope in one hand for a full rebound.

Lesson 3: Keep the long game in focus

The third lesson links with lesson 1, but really understand your investing horizon. Common knowledge says you should not be in stock market if it is under a year. But with 10-30 years, buying a stock like UA should keep you sleeping well at night. Yes, the company will mature and the market will eventually reach a point of saturation. However, as that occurs, UA is more likely begin looking more and more like Nike (NYSE:NKE) with a strong, yet measured PE ratio that coincides with significant growth and a dividend.

Reassessing the company's road map and reports remains vital to this, as does examining the leadership and their vision. UA has remained strong in all these aspects, especially with Kevin Plank still steering the ship, and thus provides me no reason for concern on my long-term horizon. But I also know this horizon will require me to have a strong stomach and weather a few storms. But that is simply life and the way economies and markets function, and only you can click the "buy" and "sell" buttons to meet your goals.

Outlook in the near-term:

As I conclude, the results of this solid report give me confidence that UA will likely gain a point of traction here in the 80s, possibly move back into the 90s. Reassured investors should return as they did yesterday. With that said, shorts are likely to also return on this spike, and the market's recent volatility does bring concerns about near-term turbulence...which long-term investors should use to buy on dips and accumulate shares.

As always, thanks for reading - the egg is almost all toweled off my face at this point, and I continue to make my weekly UA purchases. Good luck to all, happy investing!

Disclosure: I am/we are long UA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.