Avoid Overvalued Under Armour

The growth of the apparel industry has led to the rise of many companies over the last few years. One of my favorite growth stories has been Under Armour (UA). I first recommended buying Under Armour in 2014. I strongly believe in Under Armour’s business when I recommended the stock, and I still think it is nicely positioned.

However, despite the bright prospects, I think Under Armour is currently overvalued and investors should avoid the stock and wait for a better entry point in the near future.

Despite being off about 20% from its all-time highs, Under Armour is currently one of the few stocks that have yielded positive returns in 2016.
Much of Under Armour’s recent rise can be attributed to the company’s latest quarterly result.

Under Armour shared EPS of $0.48 on revenues of $1.17 billion (up a whopping 31% year over year), beating the analysts’ estimates on both fronts. Analysts were expecting Under Armour to report earnings of $0.46 on revenues of $1.164 billion. Under Armour anticipates 2016 revenue of $4.95B vs. $4.91B consensus.

Due to the earnings beat and a raised guidance, Under Armour’s shares jumped over 20% after the earnings report. Although Under Armour is witnessing strong growth and will likely sustain the double-digit growth, I think investors should sell the stock due to its overvaluation.

Under Armour is currently trading at 78x trailing earnings and the company will have to sustain its present growth rate for a long time in order to grow into its current valuation. Investors have clearly priced in years of growth in Under Armour’s current share price. Given the bearish market sentiment, I would suggest investors to stay away from buying overvalued stocks. Investors with an appetite for risk can even consider shorting Under Armour as I think the stock will move lower in the short to mid-term.

Conclusion

While I am still a fan of Under Armour’s business, I think the stock is currently overvalued. After the post-earnings pop, Under Armour will likely head lower in the coming months. Hence, I think investors should wait for a better entry point. Investors with a high risk appetite can also consider shorting the stock. Under Armour’s overvaluation amid the bearish market sentiment will probably push the stock lower in the near future.
Published on Feb 4, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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