The last time I took a look at Under Armour Inc (NYSE:UAA) back in September, I didn’t pull any punches to protect owners of UA stock.
The athletic apparel company was simply suffering the pangs of years of spending too much for too little, and with its market running into a headwind (for a variety of reasons), Under Armour was essentially dead in the water.
On the flipside, nothing lasts forever. The company has years of repair work to do and more than its fair share of losses and obligations to overcome
However, with the UA stock price still within sight of the multi-year lows it hit earlier this month, the company has become an interesting prospect again now that a turnaround story is finally on the radar.
And, ironically enough, the fact that so many pros and amateurs alike now absolutely hate Under Armour makes it a “sooner than later” prospect.
This won’t do the idea justice, but betting on a stock everyone agrees is garbage is the essence of contrarianism; the crowd is most wrong when it thinks it’s most right. Think of it as an application of the “darkest before dawn” cliche being applied to trading.
And make no mistake, analysts pretty much hate Under Armour at this time. The image below, which plots the way the pros have changed their tune on UA stock over the past two years, says so.
The average rating on the familiar 1-to-5 scale of 3.2 is slightly worse than a “Hold,” which is saying something when the collective opinion comes from a bullishly-biased crowd. Don’t believe it? Go try and find a stock that’s rated lower.
Just as alarming is the consensus price target of $13.43 from this same bullishly-biased collection of analysts. That’s only about 3% better than the current price of UA stock; target prices are generally much, much higher than a stock’s actual price at any given time.
The clincher: The short interest in, or bets against, UA stock has soared to nearly 30% of the stock’s float.
Short interest in a stock is a telling indicator. Whereas it’s easy to entertain a bearish opinion on a stock, an opinion doesn’t put any capital at risk. A short trade, on the other hand, is a risky bet that a stock’s value will go down.
Just like a traditional “long” trade can only be closed out by selling the stock at a profit or a loss, a short trade, a sale of a stock that isn’t already owned, can only be closed out when traders buy the stock.
They’re risky bets, to be sure. While the maximum loss on stock ownership is the amount initially invested in a position, the maximum loss on a short position is theoretically infinite because there is no ceiling on a stock’s price the way there’s a floor for a stock’s price.
It’s this nuance that sets the stage for a short-covering rally. That’s the point where the pain and fear of staying in a short trade becomes too great, and those bearish traders have to buy the stock to exit their short position.
Yes, that buying drives the price of that stock up even higher.
From that perspective, Under Armour’s high short interest levels are like a rocket sitting on a launchpad, just waiting for its engines to be lit.
Then there’s the not-so-minor idea of Under Armour being acquired while UA stock is in the gutter. It is, after all, still a powerful brand name, even if it’s been poorly managed.
An established brand name could help that effort get off the ground, and Amazon is certainly no stranger to unusual acquisitions.
The timing couldn’t be much better for such a deal. Relatively new Chief Operating Officer Patrik Frisk is the right guy for the job of reining in the high-potential but mostly-misguided company, and we’re starting to see evidence that Frisk is getting matters under control.
Any smart suitor wouldn’t wait for any turnaround to completely take hold, as the stock’s price would be much higher by the time it became evident.
Bottom Line for UA Stock
A bullish call? No, it’s not quite that yet, though it wouldn’t take much more for all of these clues and hints to become a solid bullish argument for UA stock.
Until then, it at least deserves a place on your watchlist. Too many people hate it a little too much, implying things can’t get any worse for the beleaguered company.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
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