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With the recent fall of high-growth company Chipotle Mexican Grill (NYSE:CMG), I began to review my portfolio and watch list for other highly valued companies that may be at risk of a similar back-to-earth moment. Of those that I have followed in the last 2-3 years, one that caught my eye is Under Armour (NYSE:UA). Let me hedge by saying this is a business with a bright future, in my opinion, but this article will discuss my worries that it has become overpriced at current levels. I would be remiss if I did not first briefly demonstrate strengths in the company's businesses.

Under Armour is a company I have followed closely since its debut on the public markets in 2005. It has been a very well-run company, with a loyal and growing consumer base as demonstrated by 9 consecutive quarters of 20% or greater income growth as of its most recent earnings report. Fantastic growth.

Under Armour is continuing success with many existing product lines such as the easily recognizable base layer products such as 'Coldgear', and progress in many newer areas is more evident all the time. They have continued to grow their women's lines (now almost 30% of the business) with products such as the Under Armour bra. Management specifically mentions kids apparel and golf products as areas of strength.

The company is also starting to gain traction in the shoe market, despite competition from behemoth competitor Nike (NYSE:NKE). An interesting fact pointed out by management in the most recent conference call is that 12 players in the last Major League Baseball game wore UA cleats, while 24 of 50 players in the futures game wore their products. This would suggest great potential for their footwear lines in years to come.

There is also the new cotton products line up that is intriguing, though admittedly cotton prices may continue to hurt margins (a fact management readily recognizes).

These are but a few examples of the success story that has thus far been Under Armour. I do not argue that this company is well run and continues to gain traction in many key areas. My concerns center around valuations at this time rather than the core business lines. With lofty valuations, I fear the company may be priced to require perfection.

Here are a few key points regarding current valuations:

(information obtained from Yahoo Finance)

  1. Current P/E of 60 or greater at time of writing, yielding PEG ratio of over 2 with most recent growth showing about 27% trend.
  2. Greater than 20% of shares outstanding are currently shorted
  3. Less than 2 points off of 52 week high at a point when many companies are having difficulty breaking out
  4. Several unresolved Macro issues (Europe, fiscal cliff) that may potentially weigh on overall markets in the not so distant future. Growth high-fliers are often the hardest hit in down markets.
  5. UA has begun gaining traction in key areas, but faces significant competition from established players such as Nike. They may continue to take market share into the foreseeable future, but they may not and Chipotle showed us what happens when there is a glimpse of a slowed growth quarter.

In summary, I am not writing to create fear regarding the company's fundamentals. However, trading at 2x the growth rate even some aggressive growth chasers begin to think twice. It is not far from the realm of possibility for the company to experience some consolidation in the event of a major European- or fiscal cliff-caused correction, or even a warm winter causing the unspeakable earnings miss.

I am simply suggesting now may be a prime time to consider locking in a portion of profits or considering more fairly valued options until such potential time a better entry point presents itself. Though not for everyone, in certain instances one may even put consideration into hedging a high flying momentum play with put options, though this is a strategy not for the faint of heart. Just fuel for thought!

I always encourage investors to be aware of their own risk tolerance, and perform their own due diligence. This article is only intended to raise some cautionary flags and spark a balanced decision-making process.

Source: Under Armour: Priced To Require Perfection?