Back on July 9th, Under Armour, Inc. (UA) undertook the rare stock split these days. The company had watched the stock soar over $100 and saw that as an opportunity to issue a two-for-one stock split.
Back a few weeks prior to the split date, Stone Fox Capital wrote [see Under Armour Stock Split Might Create A Top] about the potential for the split to create a spike in the stock possibly providing a short opportunity. After all, the stock was trading at a pricey valuation for this market and any further spike in the stock at that moment would've provided a good entry point. Without such a catalyst, it would be hard to short a strong company such as Under Armour.
Stock Split Induced Low
In reality, a weak stock market plus the stock split actually induced a selloff leading into the event. The stock hit a low of $45.47 on July 11th or two days after the split.
This move very much highlights the complete 180 in the markets since 2000. Back at the turn of the century, investors would push up stocks to new highs prior to splits. The mindset was that the split either signaled good fortunes ahead or that the extra shares were somehow free money.
Now the market appears much more skeptical than ever on any corporate moves. A simple split though not providing any economic benefits to the company should actually provide some market benefits. Stocks trading over $105 do incur some limitations on investor abilities to purchase in a diversified portfolio.
Past and Future Splits
As mentioned in the previous article, Oneok (OKE) had completed a two-for-one stock split on June 1st. The stock had hit a low right after the split so at that point the question was whether it was market weakness or something related to the split. Oneok rallied over 10% in next two months after the split.
Combined with the Under Armour price action, this signals that the market now sees splits as a negative event. If anybody such as Apple (AAPL), Google (GOOG), or Priceline.com (PCLN) decides to go forward with a split, investors should look out for a split-induced selloff as a buying entry point.
The post split bottom ironically provided a huge buying opportunity as the stock soared up over $54 Friday on strong Q212 earnings.
The investment thesis still doesn't add up to us. The stock will trade at 35x forward earnings even after updated for the guidance. The issue further highlights the point about discipline and entry points.
The only reason to short Under Armour was if the market provided an event driven "top". When that didn't occur, the best option was to watch from the sidelines. Conversely, the best time to buy the stock was on the "event" driven low. Since the thesis isn't that Under Armour provided a compelling entry point, the best option was to just stay away.
The company reported earnings of $0.06 versus an estimate of $0.05 and $0.06 last year. Nothing to get real excited about, but the market really focused on the guidance.
The company raised 2012 net revenue to a range of $1.8B to $1.82B or equivalent to 22% to 24% growth. Very solid growth numbers for a company the size of Under Armour. While these numbers were increases from what the company previously guided, it is just inline with where analysts are already.
Any major moves the rest of this week might lead to a hype induced high. The Olympics are major events for sports apparel companies and investors might become crazed expecting too much.
The stock trades for roughly 35x forward earnings after the company just guided for up to 27% operating income growth. This doesn't make the stock overly expensive. That's why the goal for any short entry would be the stock jumping closer to 40x forward earnings.
With revenue expected to soar above $2B next year, that growth rate above 25% should be hard to maintain making the valuation suspect to a major shock event. See the recent trading action in Chipotle Mexican Grill (CMG) to see what happens when a major reversal takes place due to a negative event by the company such as lower revenue guidance going forward.
Under Armour remains a major global sports apparel retailer. Since the valuation is too high for our comfort, the initial thought was to short on any stock split induced spike. With limited splits of high growth stocks lately, the stock results prior to the split weren't predictable.
Now as the stock has soared to new highs, the summer Olympics in London might provide another catalyst for shorting the stock, depending greatly on whether the stock can survive any technical damage from the late day selloff.