Under Armour has already been an embattled stock, falling from the over $100 it traded at 4 years ago to hanging around the $20 area since the start of 2017. Things just got worse.
When your company is under investigation by the Justice Department for fraudulent accounting practices, and it also has had some pretty disappointing business results to go along with this, this does tend to make things worse for the outlook of your stock.
When you add in an outlook over the next year that has the company’s results getting even worse, independent of these legal concerns, how you’ve got even more reason for people to sell the stock. On Monday, that’s exactly what people did, driving it down a further 18%.
To add to the concern here, as if we needed to, Under Armour gapped down $2.80 at the open on Monday, where the ball was then passed to the market to see if they were interested in jumping on and thinking that this may be an overreaction. Often times these big gaps are, and there are traders who make their living fading these gaps and watching them fill enough to make a nice profit.
Under Armour just kept sinking as the day went on, and this actually accelerated toward the latter part of the day, and the stock ended up not only failing to respond, it sank 4% further into the mire. This is not a good sign for this stock to put in much of a recovery rally, and the worst may not even be over yet.
People have mentioned that the loss that Under Armour has taken already had already priced in the potential consequences of the accounting irregularity investigation, by how much market cap had been removed, but a stock’s price isn’t really about the present and we can see many times the present value of a financial hit being removed by selling.
This investigation has been going on since 2017, so that part is nothing new, although the stock has been stuck in the mud ever since.
What happened is that the company is being accused of manipulating its numbers prior to this, and once the investigation started, this attention may have put an end to their embellishing the results and we got to see the naked truth more. The naked truth hasn’t been anything to get excited about even though it is starting to look a little better, at least up to the end of the last quarter.
As 2017 wore on, earnings per share continued to drop. We saw the 12-month trailing earnings go from 50 cents a share in the second quarter of the year to their losing 19 cents in the fourth quarter and seeing the year end on a sour note as well.
This 12-month trailing earnings pain actually peaked in the second quarter of 2018, and has been improving since, even though the company’s earnings haven’t been that much to brag about. They have now had 4 out of 5 quarters with positive earnings, including earning 23 cents a share in the third quarter of 2019, the earnings call that dropped them this much further into the ground.
Cranking Down Your Sales Projections is a Sure-Fire Way to Make a Stock Suffer
What bothered the market this time around wasn’t this latest earnings result, which handily beat expectations and was the best quarter that they had since the fourth quarter of 2016, although the 25 cents a share reported may have been overrepresented as this was during the time where the company’s accounting may have been suspect.
Reducing your sales growth target from the 3% to 4% that was expected down to 2% definitely can put a chill into investors, and this is more than just a 1% to 2% difference next year. We might think that knocking off 18% off a stock’s price just from this would be pretty disproportionate, but this is not just about the next 12 months.
Missing expectations over the coming year means that the risk of them doing more of this in subsequent years is increased, and what gets revised here essentially isn’t just the outlook for the next 12 months, it also involves the outlook well beyond that point. We’ve decided that, based upon these results, the good earnings result plus the lesser outlook, the company is now worth 18% less overall, and this isn’t that unreasonable actually.
Given how badly Under Armour has performed overall over the last 3 years, we may wonder how the stock has been able to hold up as well as it has, especially with the black cloud of an investigation hanging over them.
A perception of cooking the books involves more than the risk of paying a big fine, as this directly impacts investor confidence, and investor confidence is very important to a stock’s price.
It is not that the stock didn’t take a hit though, and sank as low as $10.50 two years ago, even with the plunge it took on Monday, it’s still considerably above that mark, by almost 50% in fact. A 50% return over two years is a very good one, although it was quite a bit higher last week than this and the company did give a good amount of that back this week.
This still wasn’t a stock that people would have been that keen to invest in 2 years ago, with the probe and the losses, but the market has been giving the company ample credit for their turnaround, or perhaps their returning to more normalcy after perhaps putting out numbers larger than their actual size and then having to adjust down later ones to smaller than actual size to compensate.
Sure, we’ve seen $12 billion’ of market capitalization disappear over all the company’s recent troubles, and if they do get fined, the fine will be much smaller than this, which has some observers wondering if we have overdone this, perhaps by a lot. The risk of a fine only comprises a very small part of this, with the rest, almost all of it, being a result of the overall outlook of the company over the long term being damaged by this much.
Under Armour May Even Get Sold Off Enough to be Oversold and Become a Buy
This is why it can be tricky to decide whether or not we have oversold a stock based upon weaker fundamentals, where we might want to jump in and take a shot at this company. Stock prices always involve a certain overreaction, which is why we see them move in waves, and this is a wave down to be sure.
We can’t say anything until the wave ends though, and we’re not there yet, but once we see things stabilize, there may be an opportunity here to buy this stock pretty cheaply and look to see it provide us with a good return, whether that be over a period of a few weeks, a few months, or even a few years.
Make no mistake though, with the Department of Justice probe still live, this does add to the risk significantly. The fact that the company is still on a better path than they were not so long ago, and look like they may actually turn a profit in 2019, unlike in 2017 and 2018, does weigh in on the positive side, and if not for this, the outlook for it would be poor indeed.
Under Armour’s stock may dip even further, and if the market insists on selling this stock off a fair bit more, we could indeed reach the point where it may become a good play again for traders, and for investors, a good play for the first time.
Buying it again in the $11-$12 range, where it sat two years ago, and therefore has support, might not be that bad of a place to enter this if we were looking to do that, provided that we are ready to leave if the rebound ends up not materializing and the stock ends up just sinking further.