Don't Throw This Stock Away

It's been nearly two years since I've been cranking out the almost weekly "Throw This Stock Away" column.

I single out a stock that I feel is overvalued and rip it to shreds. I do happen to come right back with three investments that I feel will beat the one that I'm dissing.

Well, today I'm going to flip the process around. I am actually going to pick out a stock that I feel is being beaten down unfairly, then come back with three companies that I think will underperform.

Who gets saved this week? Come on up, Under Armour (NYSE: UA  ) .

Sweat it out
Barron's came out swinging at Under Armour over the weekend. In his Weekday Trader column, Bob O'Brien rips into the athletic apparel and footwear company's valuation and future prospects.

I disagree.

For starters, let's tackle his valuation argument. O'Brien takes Under Armour to task for trading at 24 times this year's earnings. He pits that against Nike (NYSE: NKE  ) and Columbia Sportswear (Nasdaq: COLM  ) fetching multiples of 17 and 20, respectively.

However, instead of simply cherry-picking the fundamentals to make a case -- as O'Brien does by providing only 2011's comparable bottom-line growth -- let's take a look at both the top and bottom lines for the three companies (in both 2010 and 2011).

Growth	UA	Nike	Columbia
EPS Growth 2010	13%	(3%)	8%
EPS Growth 2011	15%	12%	14%
Rev. Growth 2010	11%	(2%)	5%
Rev. Growth 2011	14%	6%	5%

Source: Yahoo! Finance

The three companies don't seem all that comparable anymore, do they? Nike's 2011 growth spurt is coming off depressed 2010 targets. Columbia is holding up considerably better than Nike, but is still a poor man's excuse for Under Armour's growth.

It's also important to analyze performance trends, and not just because Under Armour's sweat-shaking duds are so popular in performance apparel. Let's take a look at how Under Armour performed relative to analyst earnings expectations throughout 2009.

Quarter	EPS (actual)	EPS (estimate)
Q1 2009	$0.08	$0.03
Q2 2009	$0.03	($0.02)
Q3 2009	$0.52	$0.44
Q4 2009	$0.30	$0.25

Source: Yahoo! Finance

Did you see that? Under Armour beat Wall Street expectations by at least $0.05 a share every single quarter last year. Are we to assume that analysts have finally caught up to the company's true earnings power? If the trend is your friend, then it means that Under Armour should continue to trounce guesstimates. If the company is able to keep the streak going and top quarterly profit targets by at least a nickel per share, we'll be talking about a company that earns at least $1.24 a share this year -- propping up its growth rate to 35% and lowering its forward earnings multiple to less than 20.

So, no, this is not a company that you want to throw away just as it's making a serious push into footwear, even if that push has been a bit of a stumble as of yet.

Bad news
In my regular column, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave ho. This time I'm going to look at three related stocks that I think won't keep up.

• lululemon athletica (Nasdaq: LULU  ) : One of O'Brien's arguments against Under Armour is that women account for only 20% of its product sales. This isn't a surprise, given the male celebrity athletes that wear Under Armour apparel. Even the company's initial foray into footwear was through football cleats. However, performance apparel does appeal to women, and lululemon athletica is living proof. The fast-growing chain of high-end yoga is trading at a steep 38 times this year's projected profitability and 29 times next year's perch. Yes, lululemon is growing faster than Under Armour, but that is also indicative of the market demand for high-end performance apparel for women (which Under Armour should be able to satisfy). Since lululemon's comps were negative over the past few quarters before turning positive in its latest period, this seems like an ideal time for Under Armour to cash in on the niche's turnaround.
• Nike: I'm going to ruffle a few feathers by skewering the swoosh, but numbers don't lie. Let's revisit the numbers from my initial table. From fiscal 2009 through 2011, analysts see earnings and revenue growing by 8% and 4%, respectively. In that same two-year span, Under Armour's projected to grow earnings by 30% and revenue by 26%. Sure, Nike trades at just 15 times next year's bottom-line target -- short of Under Armour at 20 -- but clearly Under Armour is growing considerably faster, and we don't know how well it will ultimately fare in footwear. The industry is filled with faded darlings, including Crocs (Nasdaq: CROX  ) and Iconix's (Nasdaq: ICON  ) Candie's that are still alive and kicking but not the giant brands they could have been. Nike's consistent. Investors know it will still be a force in 5 to 10 years. However, it's hard to argue against Under Armour's clearly superior growth.
• Callaway Golf (NYSE: ELY  ) : Under Armour's use of its athlete appeal to push into related footwear reminds me of the strategies of both Nike and Callaway. Nike parlayed its footwear strength into apparel, just as Callaway morphed the success of its Big Bertha oversized drivers into a full line of golf wear. The rub with Callaway is that it's not doing so well right now. It posted a pro forma loss in 2009, with net sales declining by 15%. Callaway sees improvement in 2010, but its outlook is still well short of its net sales in 2008 (which in turn were lower than the golf specialist's top line in 2007). I'm still skeptical, especially since interest in golf has been waning since the Tiger Woods scandal broke. If fewer fans are watching televised golf or attending tournaments, I think Callaway's 2010 targets will prove to be overly ambitious. 

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