Cramer's Bullish Call on Under Armour Ignored Inventory Problem

Let me preface this post by saying (a) Cramer is a great hedge fund manager and (b) I think Cramer does a good job explaining things that people need to know to get into the market. But sometimes his calls confound me and I think he is the traditional momo trader. And unfortunately people take his calls as gospel, when no trader is perfect or near perfect (although Eric Bolling was freaking good - anyone see him lately?)

Case in point is recent call on Under Armour (UA). Again, I cannot short individual names but on October 30th [Surprised by Strength in Under Armour] I wrote:

I am a bit surprised at the strength in Under Armour (UA) this morning off a nice earnings report but mixed guidance. Generally a high valued stock would sell off on this sort of news but thus far it has held up - the stock is right at the 50 day moving average of $60 in fact. It looks like the stock was down 7% in premarket but then bounced to actually be up for the day. Honestly, if I could, if the stock started faltering here, I'd consider it a great short for the near term.

After I wrote that I did some digging and saw the inventory numbers were bloated (much like Crocs (CROX)), but Crocs paid for it and Under Armour should not? In fact Cramer lauded Under Armour for more inventory (more on that later). So after a sham rally the stock broke below its 50 day moving average support (just below $60) where it turns into a wonderful short.
I followed that up this past Friday [Looks like Under Armour is Finally Facing Reality].

At the time I said I might be interested in the stock as it was approaching its 200 day moving average of low $50s, but that level provided zero support and the stock sliced right through it (falling knife). Now we can see one of the reasons why - insiders just tossed out nearly 2.5 million shares last week. Ouch!

1. The chief executive of Under Armour Inc (UA) sold 1.5 million shares last week, according to a filing released on Monday, but still owns nearly 26 percent of the total outstanding shares in the sport apparel company.
2. Also on Nov. 1, two of the company's senior vice president, Kip Fulks and Scott Plank, sold 15,000 shares and 850,000 shares of Class A common stock, respectively.

And yes before I go on, I realize the boilerplate "it's for diversification" and "he still owns a lot" but thats a pretty big swig to take out at once.

Now back to Cramer - I remember his comments struck me on Under Armour (UA) because he got down on Crocs for basically the same issue he was lauding Under Armour for. The only difference? One stock was going up, and one down - hence he was applauding the inventory issue at UA, the same issue he was not happy about with former fan favorite Crocs.

I believe on this one he let the price action get ahead of his better judgment; in face he basically said as much. From his Oct 30th entry on UA (as stock was in $60s) he wrote

Under Armour did it. The apparel maker pulled off one of the most amazing things I have ever seen in this business: an explanation for a 100% jump in inventory.

..on the company's conference call I heard the 100% build-up in inventory, precisely what the bears were counting on and the stock looked like it would reverse hard.

I couldn't believe it. I was appalled. Seemed like Chairman and CEO Kevin Plank totally blew it.

The call, however, was totally compelling. The company has been short on product every fall and this time it wasn't going to let it happen again. Plus, baby, it's cold outside. So whatever inventory it had will blow through in a week or two's time.

So, for once, instead of inventory being an albatross, it became a blessing. Under Armour, amazingly, is going higher, and the big reason is inventory.More important, go buy. The guys who are short the stock will now be betting that it gets hot again.

Cramer then reiterated that stance on "Stop Trading" segment on CNBC the next day (still in $60s):

Cramer also likes Under Armour off 3% on worries of rising inventory. "Yes, I would buy it," Cramer said.

On Tuesday, with the stock in the upper $40s - down >20% from his buys last week.

Sell Under Armour Jim Cramer said Tuesday on CNBC's Stop Trading! segment.
Cramer is "sick" of chief Kevin Plank selling his stock, a la Countrywide chief Angelo Mozilo. Cramer said he agrees with Morgan Stanley's underweight call on the stock. Cramer said he feels like he got "hosed" by Plank's announcement last night that he sold 1.5 million shares for almost $90 million.

So again, there is no way Cramer could have known about the insider selling, but his cheering of a higher inventory number (which he would crucify any other retailer for) only because the stock was up post earnings, is what troubles me. Again, momentum begets momentum - and Cramer has become the king of the momentum investors.

This works in today's day and age, more often than not, (see Baidu.com, see First Solar, see Research in Motion) but instead of blaming insider selling, I believe Cramer should say "I was wrong on the inventory issue" - it's never good for any retailer. I remember a similar situation with one of his old favorites, Hansen Natural (HANS) - it was a great stock until it disappointed once and then it was sort of "dead to him" from there.

So with momentum investing, keep in mind the type of investors who helped push up the stock to unnatural heights will leave at the first sign of trouble and in most cases never come back. Sort of like locusts. This is why momentum stocks (usually) take a lot of time to heal; a whole new class of investor needs to get interested since the locusts have moved on to the next field to ravage. But in time, the good ones will come back, while the bad companies will devolve into a death spiral.

Once again, Cramer has made more money than I am sure I'll ever see and is an encyclopedia of stock information. I'll make many bonehead moves like this as well (which you'll see out in the open on the blog!); just keep in mind there is danger in this style of investing and for those who dismissed the inventory issue due to this call, it did not turn out well. At this point with the insider selling, I find it hard to get interested in Under Armour, although there appears to be some support here in the mid $40s... in fact I think Tuesday's call to sell, is the correct one - as further downside should be seen in the coming weeks.

Disclosure: Long Crocs in fund and in personal account.

Under Armour 1-year stock chart

Comments

[User 121357:]

Hey Mark,
You're right. Cramer must have read this. He put a sell on it. I am a believer. Inventory can equal dollars at Christmas time. I believe the insiders needed the cash for their sub-prime payments or other things.
I am hanging on for the bounce into the mid 50's as we approach next earnings.

2007 Nov 08 08:49 PM

[User 121357:]

Hey Mark,
You're right. Cramer must have read this. He put a sell on it. I am a believer. Inventory can equal dollars at Christmas time. I believe the insiders needed the cash for their sub-prime payments or other things.
I am hanging on for the bounce into the mid 50's as we approach next earnings.

2007 Nov 08 08:50 PM

[skeptical:]

A conspiracy theorist would wonder if Cramer made a mistake or if there was something darker going on.

2007 Nov 08 10:19 PM

[TraderMark:]

Actually he came out on the show last night and did almost verbatim apologize in the manner I wrote above... obviously the public pressure I applied worked haha. I gave him kudos today in the blog for coming out and saying what is true. If Crocs should fall 50% for 'inventory', no way UA should be UP. I still like UA for the long run, just not short term.

2007 Nov 09 02:57 PM