(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of UAA, UA company.)
Under Armour Inc.'s (UAA, UA) stock has declined by roughly 35% over the past 52 weeks, and may be poised to fall 15% further based on a reading of the technical chart and an options market analysis. Should that happen, shares of the athletic apparel manufacturer could drop to approximately $11.50.
The company is set to report results on February 13, before the stock market opens. Analysts are looking for the company to show that revenue was flat versus the same period a year ago at $1.312 billion, while earnings are expected to come in at breakeven—a decline of $0.23—according to Ycharts. But even more important will be the first quarter guidance, where analysts are looking for revenue to rise by only 1% to $1.13 billion. (For more, see also: Why Under Armour's Plunge Has Only Begun.)
Under Armour has seen its revenue stagnate for some time now, and that is the primary reason the stock has fallen so sharply since peaking in October of 2015 from a price around $50 per share, to a price of $13.10 on February 6—a decline of about 74%.
The stagnating revenue is likely why traders are so bearish on the upcoming results. The long straddle options strategy is pricing in a rise or fall in the stock of roughly 15% from the $13.50 strike price set to expire on February 16. That would put the stock in a trading range of approximately $11.50 to $15.50 because the cost to buy one put and one call is about $2.06.
The number of puts heavily outweigh the calls, with nearly 7,500 put contracts of open interest to only 1,200 call contracts. But with the puts only costing about $1.05, it is a very small wager with a notional value of only $750,000.
Critical Support Level
The chart of Under Armour also tells a story of a stock that is likely heading lower. The stock has been trending lower since peaking at $16.70 back at the end of December, after filling a gap created the last time the company reported results on October 31. If the option bets are correct and the stock should trade to the lower end of the implied long straddle range, it would also take the stock to critical support at $11.50. Should support not hold, shares could fall even further towards $9.50, a decline of nearly 28% from the closing price on February 6.
The current technical and options market outlook point to a stock that appears to be heading lower. But should the company surprise to the upside when it reports results, the stock could get a meaningful move higher.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.