The Hidden Fees of Stock Picking that will make you lose over 50%!

The stock market has been very sluggish over the past several weeks, the indexes are near 2017 and 2018 depressions. The frightening news and financial professionals believe that the stock market can extend lower. Recent data and the business shutdown are evidence that a recession is possible. I believe this recession or fear of one is positive for the US economy. Though, remember, we have picked up signs of life before in every economic recovery, only to be disappointed. Regardless of where the stock market is headed in the short term, remember in the long term stocks will do well. In 2 years, the stock market can drop another 30%, but in 20 years, the market will historically provide a return 60% or better.

You are probably aware that studies show that professional investors have trouble outperforming the market through stock picking. But with any statistical data, be careful around the academic subjects that have selected bias. Most of these data consider professional investors as anyone who can open a fund. Many well connected or trust fund babies like Chelsea Clinton’s husband(Marc Mezvinsky) always underperform. Pensions and endowment funds received 80cents back for every 1 dollar of investment from Marc Mezvinsky. Most of these professionals are wealthy enough to utilize their capital or connected well enough to raise money from close networks. Only rarely do these groups of wealthy or connected professionals do the required investment due diligence. Buffet famously said, “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”

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Losing out on other opportunities

In that respect are many hidden costs of stock picking. Remember when Real Estate Investment Trusts (REITs) were the best performing industry from 2010 to 2017, then the entire industry quickly turned negative. This is because interest rates remain depressed, and there’s an oversupply of commercial buildings, primarily shopping centers and malls. Malls were a great industry to buy between the 1970s and late 1900s; most developers focus their efforts to build out malls that are becoming empty shells and debt load. So why am I talking about real estate?  If you didn’t know about the real estate information before reading this blog and you were buying REITs, then you are one of these hidden fees stock pickers. 

Nevertheless, too many people consider themselves a stock-picking genius. A majority of people will find themselves intelligent enough to invest, but being smart doesn’t compensate for higher investment returns. Being a business individual or entrepreneur doesn’t make you an investor either. Being an investor is a line of work, just like it is an attorney. Anyone can be informed about their legal rights, but it doesn’t mean they have the knowledge to utilize the information to defend themselves in court. 

Many lack the dedication to do investment due diligence. Anyone can attain a good above-average size return for a few years in bullish time. To be clear, I define a stock picker as anyone who can’t explain the commercial enterprise model, can’t read a financial statement, often has short term gains in their portfolio and a majority of their portfolio doesn’t have long term holdings.

The Hidden Costs of Trading – FIX Flyer
The Investment Hidden Fees

What are the hidden fees of stock picking? I called it the T&T problems Time & Taxes

  1. The first cost is Time. If you have little knowledge and try to spend time learning, then you are running against the clock against someone that has been more knowledgeable. Novice investor spend time picking stocks without ever learning investment due diligence. Studying makes you informative but it’s a long process before you actually become knowledgeable to execute an investment. Being knowledgeable comes from information and experience.
    Everyone on the internet is informed about politics, but not everyone is knowledgeable. If TV ran the news on Biology and Chemistry 24/7 like political news, we will all feel like we can discuss science topics like we are all Ph.D. Scientists. I have another upcoming blog that will talk about the difference being informed and knowledgeable. If you keep picking stocks without being knowledgeable, you will underperform by 5% or more a year (50% in potential missed gains over 10 years)
  2. The second cost is Tax – if you’re trading in a taxable account. The difference between short-term and long-term capital gains is generally substantial. When trading stocks, it can be tempting to exit positions doing particularly well after only a few months. Doing this frequently results in higher tax costs and it is something I avoid. Capital tax gain taxes are 0 to 20% vs income taxes that can be about 25% to 40%. Think about how much money you will leave on the table if you are paying income taxes on your investment returns. My investment strategy is to target long term over short term cap gains. Most people get happy over short term profit (but pay income taxes on it).
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Time & Taxes

I want to reiterate that it is important to remember that the average investor seldom realizes the returns they see on the chart of that stock. Taxes and Time can seriously erode performance, especially for frequent stock traders in higher tax brackets. Many research studies show that these and other mistakes made by the ordinary investor can reduce returns by 4% or more a year relative to a stock index(which haven’t included the short term tax fees). My mission is to give you the best possible after-fee and after-tax returns that matter for your long term investments.

How to invest in stocks for beginners: Begin investing within 30 days

There are two ways to invest in the stock market. The first way is to invest to get the market average return of 7%, which is the S&P 500. The second way is to invest in individual stocks to outperform the S&P 500 index.
***If you have specific inquiries or anything in my post that I can help clarify, please feel free to comment or email me.



1. Decide if you want to put in the time to beat the stock market average returns
(Week 1)

Passive investing- The goal of passive investing is to achieve average stock market returns. The average return over the last 100 years in the stock market estimates 7% – 8%. To start passive investing you want to buy a mutual fund or ETF that represents the S&P 500. These mutual funds and ETF are provided by Robo-advisors or standard investment advisors.

  • For Passive investors, you only need to go with low and cheap online services (i.e., Vanguard and Fidelity), robo-advisors (i.e., Wealthfront and Betterment), or anything that has management costs below 1% of your total asset value.
    • A note about indexes: The S&P 500 represents the largest 500 companies, therefore, it’s often used as a proxy benchmark for the US stock market performance. Other indexes represent niche industries or smaller size samples. For example, the Dow isn’t a great representation of the overall stock market because it includes 30 companies, so it’s just a small cross-section of the thousands of companies in the market. This is the reason why the S&P 500 is used as the standard benchmark instead of other indexes.
Robo-Advisor Services
  • Passive investment services are easy to understand and they provide straight forward questions to help you set up an automated diverse portfolio to the S&P500 that would provide you an avg or slightly above average market returns. 
    • A note about Robo-advisors: Their financial method uses algorithms to replicate the average market returns of the S&P 500 index.

If you want to be a passive investor, you would only need to seek out cheap and simple services that can provide your returns similar to the S&P 500 index. These services are cheap because it replicates the S&P500 and other indexes.


Active investing- The goal of active investing is to pick stocks and beat the stock market average, which is the S&P 500. Active investment requires putting in the time to research and analysis. In becoming an active investor (or the DIY approach as I like to call it)  you will want to learn key aspects to analyze a stock and strategies to develop above the stock market average.  

  1. Learning about an industry, company, and competitors
  2. Learning about investment strategies can outperform the average return 
  3. Learning how to read and create financial statements

If becoming an active investor is the path you want,  then continue reading.

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2. Start by reading about industries and companies you’re most familiar to you. (Week 2)

Determine a business industry that is easy to understand. The easiest industries to learn are from your profession or products you purchase.

For example, an Apparel company has simple operations. Apparel makes clothes that offer branding value with unique design distinctions. The Apparel industry is a multi-billion-dollar opportunity, but it is a very competitive industry. Apparels can offer their goods in physical and/or digital distribution channels. One of my favorite Apparel business is Under Armour. 

In the beginning, learn general facts and find interesting facts on this business.  Ask critical questions because if you don’t have enough confidence in your research you could cost your total life savings. But don’t worry, this should be a fun process. It’s like finding the perfect ingredients for a recipe so that you have an enticing outcome! Read everything you can on the company’s merchandise, management, and business risk. It may be tempting, but for now, let’s hold off on the financial statement. We should uncover the basics about the company first. Once you have learned about the company, the financial results will make sense. 

Here are some initial questions I might ask  about Under Armour:

  • Why is Under Amour (UA) a better investment than its competitors?
  • What makes UA better than other Apparel businesses?
    • Does UA have any patent on their clothes and shoes?
  • Who manufactures UA clothes? 
    • Is there a contract, partnership from the manufacturer? 
    • Why was this manufacturer selected?  
  • Who are UA shipping partners?
    • Is UA shipping partner contract?
  • Why does UA have its own stores?
    • How many stores does UA have?
    • How many retail partnerships do they have? 
  • Did Under Armour ship it from a warehouse, and which warehouse?
    • How did they decide to pick this warehouse?
    • Where were the clothes made?
  • Who designs UA’s clothes?
    • What is the designing strategy, are they into athleisure or not? 
    • Who’s the design team leader, how long did they work at the firm?

Notice that I did not list any financial or math-related questions. The point of this exercise is to get familiar with the industry and business. As you are learning, there will be more financial jargons and it will get more confusing. Do not be discouraged. If it is confusing, you are learning.

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3. Learn about investment strategies (Week 3)

While there are many investment strategies, the best strategy to get an above-average market return is to buy undervalued companies, which is called Value Investing. 

Also, value investing strategy provides a strong foundation for an investor to learn about other investment strategies. Value Investing is a popular strategy that created many billionaire investors, to name a few, notably Warren Buffet, Seth Klarman, and Bill Ackman. 

What exactly is value investing?

Value investing is identifying companies with a current market price that is less than their intrinsic worth, which means the stock or company is “undervalued”.    

How do I determine a value of a stock and know if a stock is undervalued?

The Discounted Cash flow – this method provides the net present value by estimating the company’s future profitability to help determine the company’s values. The discounted cash flow will help provide a range of value to the entire business. 

Another way to find Undervalued stocks is by using the valuation ratio. A valuation ratio shows the relationship between the market value of a company or its equity and some fundamental financial metric (e.g., earnings). The point of a valuation ratio is to show the price you are paying for some stream of earnings, revenue, or cash flow (or other financial metric).:

  • Price/Earnings – The historical average of the S&P 500 index P/E is 15, therefore anything under 15 could be considered undervalued relative to the historical average of the S&P 500 index. 
  • Price/Book Price is the stock’s current market price. Book value represents what the total asset of the company is worth. So if the price of a company is worth $100M, and the book value is worth $110M, you will see a P/B= .90 ($100M/$110M)

Not all undervalued stocks are good investments, there are companies that may reflect undervalued but aren’t performant, and stay that way. We call these value traps.  A value trap will have a valuation that appears cheap, but it has risks and troubles that will cause the company to continue declining.

Understand why stocks become undervalued

  • Missed expectations and lower guidance: Shares can plunge if the company provides quarterly and annual reports that misses target earnings or  provides guidance below Wall Street estimates. 
  • Market crashes and corrections: If the entire market drops, it’s a great time to look for undervalued stocks.
  • Bad news: Just like when a stock misses analysts’ expectations, bad news can cause a knee-jerk reaction, sending shares plunging more than they should.

Cyclical fluctuations: Certain sectors tend to perform better at different stages of the economic cycle. Sectors that are out of favor are good places to look for bargains. Again, not all out of favor sectors will ever return back to normal business operations. Think about how often restaurants and the retail industry go out of business.

Tesla stock priced at $200 could be a value stock as Apple is a value stock. Investors underestimated the technology and complexity of Tesla, comparing Tesla to other traditional auto companies. Similarly, it is much like how investors compared Apple’s iPhone to BlackBerry Rim. Investors underestimated the software, ecosystem, and design.  

If you could buy a $100 bill for $70, wouldn’t you jump at the chance to do so? While value investing is a little more complex than that, it’s the general concept behind finding undervalued stocks for your portfolio. Value Investing is not the only investment strategy, but it is the most simple, and the most difficult strategy to master.


4. Learn how to read financial statements and how to create it from scratch (Week 4)

Financial statements will be disconcerting to learn. If math isn’t one of your strong skills, it will be more difficult. But, most of the investment math is simple algebra. If you cannot interpret a financial statement well, don’t rush to buy stocks. Start a stock account with only the amount that you can afford to lose, but still assert the same spending habits. The amount of money you need to buy an individual stock depends on your investment experience and skills. 

How do you know when you are fundamentally ready to invest? 

  • Q: Can you identify seasonality in a financial statement?
  • Q: What happens to cash flow if customers are paying with credit cards instead of cash?
  • Q: How much profit does a company have to pay off its current debt obligations? 
  • Q: Can you teach someone how to read a financial statement?Image result for learning ot read financial statements

Learn how the financial statements are connected. If this financial statement is confusing to you, email me at TomNguyen@agarwoodcapital.com for investment courses or learn from the investment videos from Agarwood Capital Youtube Channel

 

 

 

The Music Will Stop On GameStop

Why is there a used game industryThe arrival and growth of the used game stores 1990s to early 2000s

After baseball cards, the next ‘collectible thing’ was used and collectible video games. The new era of technology help produced video games frequently and created a secondary marketplace for older games. There were then many new game releases, and customers who finished a game would be willing to trade their games for a new or used game.

Since customers didn’t know how much their games were worth, it was easy and convenient to sell their used games to the game store. The similarity that baseball cards and used games share is that it was missing an official marketplace for customers to know if the products are price-efficient. A guy named David Pomije from Minnesota saw the opportunity in the used game market and established Funoland. Funoland was doing so well that in 1998, Forbes listed it second place on the magazine’s list of 100 of the fastest-growing companies.

(If you want to read more about Funoland history and how it became Gamestop go here: FuncoLand History: The Company Behind Used Video Games written by Ernie Smith)

As a teen, my favorite store was Funoland. Funoland was the easiest place to buy video games and it was a fun place to play the demos. In the early 2000s, Funoland was merged with EB Games to become Gamestop.

1. 2010 to Present –  Gamestop business model will continue to decline because of decreasing consoles unit sales, weak pricing power, digital downloads, and used games are less valuable In the final 10 years, many retailers fought for survival but eventually failed. Specialized private equity groups operated in the retail industry like surgeons, but failed to revive retail stores. The days are getting darker and PE firms have recognized it is not worth saving the retail industry. Many retail giants have disappeared or greatly reduced in size. Millennial customers love their 90s nostalgia moments, but they are not going to shop at Gamestop because it is expensive, inconvenient, unethical, unauthentic. All niche communities are built on authenticity, it’s the currency that GameStop lost many years ago.

  • Management is speculating that New Game console would recover sales in 2020. In the most recent 2019 quarter, GME’s CEO was surprised by the steep sales decline. There is an oversupply of GameStop stores,new games and used games are so much cheaper everywhere else. Bullish investors believe Gamestop can automatically recover sales through the new gaming cycle.Over half of Gamestop console market opportunities disappeared between 2008 and 2020. 2008 total consoles sells were 90 Million consoles were sold Worldwide in 2008, but 2020 total estimated around 30M to 40M.

Overview

The Global Unit Sales of Current Generation Video Game Console in million units (2008 to 2017)Infogram.

  • Used games are less valuable each year and Download games are more popular each year. Used games remain a substantial income for GameStop, but its sales in that category have fallen every year since 2011. In 2019, Sony sold over half of its game sales came through downloads. Microsoft, Nintendo, and Google have invested heavily in online gaming.

Playstation 4 was released on Nov 15, 2013. GME stock from Nov 2013 to Nov 2017 is -67%

  • Gamestop supply chain and marketing are some of the worst in the retail industry. GameStop does not offer free shipping unless its over $50. The top competitors are upgrading their business with robotics, software, and logistics innovation.
  • Corporate culture is toxic and the business execution is mediocre. The gaming culture is really aware of Gamestop’s misleading business practices. What will make Gamestop more successful than their competitors? I’m still searching for answers. If anyone told me they found Santa Clause on the North Pole, I would trust you before I ever believe in Gamestop’s management plan.
Image result for gamestop fail"
  • Weak Pricing Power– New and popular games are typically discounted 10% cheaper. If the games are not discounted, the customers can still earn 5% membership discounts from using the retailers’ branded credit cards. Also, used games are cheaper on eBay, FB, and Craigslist.
    • GameStop cannot compete against cheaper alternatives. Major retailers are taking losses with their gaming discounts, with the promise that it builds brand loyalty and customers buy other higher-margin products to make up for it. Competitors are beating GameStop through pricing, convenience, and superior Omni channels. GameStop knows it cannot compete on price, so it makes up creative membership deals that will mislead customers into buying overpriced used games.
    • Used Cheap Games are recession-proof, not expensive used games Consumers will buy the cheapest alternatives in a recession, not overpay for discretionary goods. In an economic system where customers could use an extra buck, they would prefer to make $10 on eBay than to lose $10 at GameStop. GameStop trade-in value doesn’t make economic sense to a consumer.  Gamestop will always offer a lower trade-in price, and then force the customers to buy merchandise that are typically 10% or more expensive than Walmart, eBay, and Amazon.
    • Low Trade-in value – Customers can get a better value from eBay, Facebook or Craigslist. There are multiple ways to sell and buy games online that are more convenient and price better.  The cost of shipping video games is really affordable, and you still make more money selling games on eBay than you would at Gamestop.
  • Not Convenient to drive to a game store – It’s easy to find popular games from large retail spots when customers can drop by for other items. If customers are looking to buy video games, they aren’t rushing to store for it. The supply of used video games is plentiful and fairly easy to find popular game titles from other marketplaces
  • Lack of Customer Service & Knowledge – GameStop has unrealistic sales goal and use the forceful sales tactic. Gamestop’s innovation is making membership points misleading and confusing.

2. History of Poor Capital Allocation – Low ROIC, no investment in business and waste of share buybacks.

  • Aggressive Share buyback won’t work – Since 2010, GameStop has had a Capital Allocation Strategy that wasted over $400 Million in Share Repurchase. This number doesn’t take out the recent $120M shares buybacks from 2019. A company should simply buy back shares if it has ample funds to take care of the operations and the stock is selling at a large discount on a conservative calculated intrinsic value.  Gamestop will run out of cash by the remainder of the year, and it will depend on revolving high-interest credit to pay for their operations.
  • Liquidity Fallacy –If customers don’t shop at GME, then Cash flow doesn’t matter. Surly, Michael Burry understands liquidity and cash flow, he’s one of the few investors that bet on the Real Estate liquidity crisis. But Burry and many other investors failed to see the cultural currency in the gaming community. Clients are the most important currency on GME balance sheet not USD dollars. Much like how Eddie Lambert said Sear’s had enough liquidity to carry through a turnaround strategy, but customers were not shopping at Sears. Price-cutting can quickly stabilize a financial statement, cutting too much cost will deteriorate the customer’s shopping experience. There are over 10,000 companies in the world, but Burry chose GameStop as one of his TOP ideas. I was initially shocked at his decision to buy GameStop, but I wasn’t totally surprised. Many investors believe their skills and knowledge are transferable in a different industry.
  • Fallen ROIC since 2014 – GameStop ROIC has fallen every year since 2014. It had not made any significant investment in their business in the last four years.
Historical 10 year ROIC of GME

3. Proposing unproven Strategies – gaming events, retro games, and merchandise will not replace the loss of used games revenue.

  • Store gaming events are not proven strategies – Management has not provided information that shows gaming store events could create profitability. Most GameStop stores are too small for hosting gaming events. Gamestop had a press release about their gaming events in Spring 2019, and it has been quiet ever since.  Gamestop probably most already failed its first gaming event attempt. The best gaming hosts in the industry are only mildly successful.
  • Increasing Retro and Rare Game sales will not stabilize revenue – Rare games sell on eBay at a much lower price than Gamestop trade-in value. Collectible Games will slow down the turnover inventory, it will take up shelf space from other products.
  • Shifting sales to nongaming merchandise will turn GameStop into another commodity store – GameStop owns the ThinkGeek store that sells nongaming merchandise and its sales are going down too. GameStop eliminated the position of Chief Operating Officer and in recent months has begun to switch some of its business models toward collectibles and trading merchandise. In other words, GameStop is basically converting its store into another failing business which is its sister brand ThinkGeek. GameStop best non selling items are BoobleHead that are made by Funko.  Gimmicky products like Bobbleheads are the beanie baby 2.0… Bobbleheads’ are high-net income margins, but it doesn’t add any value to GameStop. GameStop does get some foot traffic from Bobbleheads, socks, T-shirts, and other random merchandise, but total sales are not great enough to offset declining game sales. In the early 90s, Trading card stores attempted to switch from baseball cards to other popular merchandise, but eventually, the hobby store industry disappeared.

Gamestop is hoping for Collectibles to turnaround the company

Valuation Verdict:

GME at its best would be worth $5/Share, assuming a small decline of -2% revenue CAGR and an average 3% EBITDA Margin.    Bullish investors estimate GameStop valuation between $6 to $10, but it doesn’t require complex math to explain GameStop’s valuation. Analysts are overcompensating on complex valuation because they believe used video games can be a sustainable business model. The next 12 months will be critical for Gamestop to improve its revenue or else the stock price will take a nose dive. 

Gamestop has less than 1 year to prove to investors that they can stabilize and better sales. GameStop holds $290 million in cash and $419.4 million in debt. Gamestop had many years to turn round the company, it just burned through its cash to buy back a company that offers customer zero value. Buybacks are great if the company is greatly undervalued and if it receives enough funds to support both business operations and buybacks. In Gamestop case, it only has adequate money to pay down debt or buy back shares.

GME will drop to $3 again and become a penny stock in the next two years. Private Equity dry powder is at an all-time decade high, and there is still no offer for Gamestop. Based on the last 4 quarters, GME is projected to lose a minimal of $160M to $200M in 2020.

Conclusion:

The existence of Gamestop came from the void of the used game market. The industry has evolved and that used game void is available through multiple channels that offer cheaper prices and better value.

A new generation of game consoles is arriving later this year, buying GameStop sometime to hold out. The question remains, how much longer can GameStop business model remain relevant in a fast-growing digital distribution era? Get ready to Say Rest In Peace, GameStop will join it’s non-innovative retail family members shortly.

Can’t stop, won’t stop, Gamestop selling drops ’cause it, it gets down baby, it gets down baby

The GameStop, gameflop, and StockDrop

Under Armour, Under Pressure

Under Amour crashed over 15% after their earnings report on OCT 2016 down to $30 per share… Then on Jan 2017, it reported a second straight quarter of sales lower than anticipated. UA stock is steadily declining to $19-20 per share (4/9/2017). Under Armour is facing challenging sales growth and public relations challenges.

Team UA
Under Armour Sponsored Athletes

UA sponsors some of the biggest names in the industry, including Stephen Curry, Tom Brady, Micheal Phelps, Bryce Harper, Jordan Spieth, Cam Newton, Clayton Kershaw, Lindsey Vonn, Misty Copeland, and many more. Major League Baseball also struck a deal with Under Armour to supply the league uniforms beginning in 2020. UA has one of the best brand ambassadors with MVP recognition from Football, Baseball, Basketball, Swimming, and Golf. The Sponsored athletes are making UA brand relevant as Michael Jordan made Nike relevant in the 90s.

A month ago, Under Armour CEO, Kevin expressed his favorable political views on President Trump, but Stephen Curry, Under Armour top sponsored athlete did not partake the same sentiment about Trump.  Referable to the current political climate, Consumers already have pledged to boycott companies that support Trump. When can we expect Under Armour problems to reset, and refocus itself to become a better company?

What happened to UA?

Under Armour was worth more than $20 billion in 2015 and surpassed Adidas to become the #2 sportswear brand in the U.S. But it rapidly ran into problems that were caused by bad strategic choices.
In the past few years, they have created some critical mistakes investing over $710 Million on fitness apps, and over $100M on R&D for gimmicky tech products like weight scales that provided no value.
1. $150 million for MapMyFitness in 2013
2. $85 million for Endomondo
3. $475 million for MyFitnessPal, both in 2015.

Is Under Armour a digital health, tech or an apparel company?

One of their biggest strategy announcement in recent time was selling more clothes at Khols, which will temporarily add revenue, but it will KILL the BRAND. Do we see any Lulu stuff in Khols? It made a half-ass attempt on Athleisure and said they are departing to focus on PERFORMANCE apparel, it sounds as gimmicky as their tech strategy.

Business Profile
UA expanded their business and signed multiple famous athletes like Tom Brady, Steph Curry, Bryce Harper, and Jordan Spieth. Most of these athletes are MVP or very recognizable athletes in their sport. In recent years, Under Armour stock the market, but it still has all the winning traits to become a great stock to win in the long-run.

UA’s brand identity uses a combination of strategies:
1) On-field authenticity with professional athletes and teams that use its brand and marketing
2) Brand-building activities that position Under Armour as an authentic lifestyle brand with the broader consumer market of active lifestyle consumers, where we think it is beginning to make inroads. 

Supporting UA’s penetration into the sports apparel market is their investments in direct to-consumer business (e-commerce, catalogs, less than two dozen retail stores, and 143 factory outlet stores in North America at the end of 2015), expansion of domestic and international wholesale distribution, and adjacent products. UA offers a wide range of products, including performance training, cleats, running and basketball shoes. The company’s accessories include baseball, football, golf and running gloves incorporating HeatGear and ColdGear technologies, as well as socks, mouth guards and eyewear developed by licensees


UA has 4 product categories: Apparel, Footwear, Accessories, and Licensing all product category has grown 10%+


UA Revenue Distribution: UA’s penetration of the active use sports apparel market is being supported by investments in its direct-to-consumer business (e-commerce, catalogs, less than two dozen retail stores, and 143 factory outlet stores in North America at the end of 2015), expansion of domestic and international wholesale distribution, and product adjacencies.

Can it continue 2016 Growth or will it decline?
As Uncle Ben would say to Peter Parker’s business ‘ With great growth, comes great responsibility to shareholders’. When UA signed Steph Curry to Under Armour, it helped propel UA basketball sales to compete directly against Nike signature shoe brands like LeBron and Kobe. Investors became over enthusiastic about the sales growth and valuation high as 80x P/E between 2014 & 2015.


From 2012-2016 UA CAGR growth was 27%, but the company has reported a trend of declining earnings per share over the past two years. There was a 60% revenue growth in countries like the UK, China, and Germany. In recent earnings, management has lowered its 2017 revenue forecast for 10%-12% growth. UA still has great brands, profitable products, and revenues over 10% a year, but the stock went down ~50% in valuation. Investors are left to once again marvel and question of the power of the Under Armour brand, made famous by catchy commercials, and famous sponsored athletes.

Valuation $24 Per Share
Revenue expected to grow 10  to 12 percent to reach nearly $5.4 billion
Gross margin expected to be slightly down compared to 46.4% in 2016 with benefits in product costs being offset by changes in foreign currency and shifts in the overall sales mix, as the footwear and international businesses continue to outpace the growth of the higher margin apparel and North American businesses;

  • Operating income expected to reach approximately $320 million
  • Effective tax rate of 30 percent
  • EBITDA – 10 to 12%
  • Growth: Assuming UA can maintain the same growth rate of 10-15% for the next 5 years, then the fair price is a 15% to 20% upside.
    • Shoes sales drive by basketball shoes
    • International expansion
    • Direct Revenue from E-commerce
    • Increase sales from Woman’s apparel
    • Supply chain improvements

Risk-
1. Macro – a slowdown in spending on discretionary

2. Distribution problems – Large chains such as Dick’s and footlockers are still expanding their Under Armour assortment. The business partnership has to grow and the logistic operations need to stay lean to keep operating cost low.

3. Direct to consumer problems – While the direct-to-consumer business appears to be enhancing returns, it carries higher risks through markdowns and operating leverage, and requires ongoing investment in stores, websites, marketing, and customer service.

4. Brand dilution – UA is selling at Khols, and discounting products too often. Clearance of excess product through outlet stores

5. Confusing Strategy and Overpaying for Apps and hardware – using a majority of its cash and resources to launching a digital health service and gimmicky tech products. Under Armour culture and talent is not known for health or tech.