That which humans collect, we have a natural urge to categorize. Books, rocks, baseball cards, whatever -- and stocks are no different. Some we classify as "growth stocks," because their revenue -- and, hopefully -- earnings are rising relatively rapidly. Others are viewed as "value stocks," because based on the fundamentals, they look underpriced. If the business has been in the habit of distributing solid, often rising dividends, it might get called an "income stock."
And then there are "story stocks" -- the ones that are trading less on their current numbers, and more on the narrative that investors and the media have built to describe why eventually, the revenue and earnings will surely arrive. Paint a compelling enough picture, and investors will bid your company up on hope and faith.
But Motley Fool co-founder David Gardner sometimes takes a different view of the "story" concept -- he prefers to think about the way occasionally, an addition to your portfolio creates a story that's unique to you, and that clarifies a specific nugget of investing wisdom.
In this episode of Rule Breaker Investing, he invites several of his colleagues into the studio to share some of their favorite "stock stories" and the lessons they learned from them. For this segment, his guest is analyst Aaron Bush, who talks about how he found his way into -- and out of -- Under Armour (NYSE:UA) (NYSE:UAA).
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on May 1, 2019.
David Gardner: Aaron, you brought a story to the table.
Aaron Bush: I have. The story I have today is about Under Armour, or more specifically, my story with Under Armour. Let us call this story "I Will Protect This Portfolio."
Gardner: [laughs] I already get the allusion, because many of us who follow Under Armour remember the whole "Protect This House," which was a big part of their branding, I want to say 10 years ago.
Bush: Has it been that long?
Gardner: Maybe 15. It feels like a long time ago. But you would know better than I, Aaron. This is your story, and my memory, I have to admit, is not that great.
Bush: So, before jumping straight in, let's start with the prologue. I bought my first stocks ever in 2006, 2007, which as history now notes was the calm before the worst stock market storm in decades. To make things worse, I had absolutely no idea what I was doing. But as you can imagine, that's a pretty good time period to learn.
Gardner: Aaron, how old were you in 2006?
Bush: 11-ish. Really knew nothing!
Gardner: Love it! Buying stocks at the age of 11. Keep going!
Bush: Well, it didn't start very well. At that time, I was using Value Line, using their ratings on timeliness, on safety, opportunity. I decided to buy a bunch of blue chip stocks like Johnson & Johnson and Procter & Gamble, but also -- super embarrassing to admit now -- a bunch of financial stocks like Bank of America, Merrill Lynch, AIG, do I need to go on?
Gardner: So it was rough, rough seas within 24 months of your purchasing?
Bush: It was. It was very rough! As you can imagine, that didn't end well. I had brutal losses on a bunch of stocks. A bunch of stocks I knew nothing about. Let's go and enter chapter 1 here, where Under Armour comes in. I was still learning, but based on those losses and understanding that I knew very little about those stocks, I recognized that something had to change. So what I decided is that, instead of just using these arbitrary ratings that other publications throw out, I would decide to think for myself, look for obviously great companies that I understood. And the first company that comes to mind, for me at that time period, was Under Armour. That was a stock that I bought early 2009. I had just gotten rid of a bunch of those financials stocks. I had more than enough [laughs] to do with that at the time.
Gardner: Were you wearing Under Armour as a kid? Were you seeing other kids rockin' the Under Armour logos?
Bush: Yeah, that's part of it. At the time, the stock was trading for I think a split-adjusted $3. But more importantly, I like the brand. I saw in front of my very eyes the popularity rise right in front of me at school, right as the financial turmoil was going widespread, stealing all the headlines. Under Armour wasn't in those headlines. Despite the crisis, it was actually doing pretty well, and I could see it right in front of me.
So after reflection, I bought some of those stocks, bought some shares in Under Armour. And that that really marked in my mind a radical change in my investment philosophy, from using Value Line and other people's thinking, to looking at my own life, thinking for myself, understanding more clearly what makes for a multibagger, looking for, a lot of times, small companies with long runways, swift growth, and also understanding the importance of what you cannot assign numbers to, the importance of great management -- in this case, Kevin Plank -- and then the power of a great brand, which doesn't show up in the cash flow statement in any way at all.
For years, this stock was phenomenal. It rose from about the $3 that I purchased it at, split-adjusted, up to about $50 in 2015. For a time I was earning 15X or so the money that I put in. It became very quickly a large percentage of my own portfolio. That's really because Under Armour was rapidly expanding into new countries. They were launching new verticals all the time. They were seizing major partnerships with big athletes. They even had an Olympic deal sometime in there. So what could go wrong, David? Everything was fantastic.
Well, it turns out, things can go wrong, even with great companies. In 2015, they announced the acquisition of a couple of major fitness apps, including MapMyFitness probably most notably. And that sounds fine until you realize that connected fitness was much more sizzle than steak. That business model really had nothing to do, no direct plugin --
Gardner: With the apparel industry.
Bush: Right, with selling apparel, selling shoes. They also completely decimated their balance sheet. They got rid of most of their cash, they took on a ton of debt to buy these apps that ultimately fizzled out. And there were also signs, I think at that time, very early signs that traditional retail could be problematic and decelerate growth one day.
If you take that, and then also compare it to the fact that the stock was trading for about 80 times earnings at the time, in my mind, I saw a pretty clear mismatch between, "Man, this isn't as great as everybody seems to think it is," and, "Wow, this is one of the most expensive stocks I see out there right now." And I'm a person who's typically OK, buying the stocks a lot of people think are expensive.
Gardner: As am I, and that's part of what we teach on this podcast. And I have to say, Aaron, even though I know that the next chapter of the story is hard times for the company, and in some ways, they might still be mired in chapter 2, if you will, but fortunately, it's not Chapter 11.
Bush: That is true!
Gardner: I think that Kevin Plank was trying in some ways to get ahead of where the future was going to be, and make investments in a technology platform and transition the company. At least this is what I was saying about this stock. It remains an active recommendation in Rule Breakers today.
Bush: Yeah, I do think a lot of his thinking is still prescient, it was just a mix of bad timing and poor capital allocation. Not everything was terrible. But for the sake of this company at that time, it didn't work. So, in a rare stroke of great timing on my part, which almost never happens, and I'm glad I get to tell this story --
Gardner: That's why we're telling stories! The greatest things that we can tell!
Bush: [laughs] I actually sold about 90% of my position in 2015, right near the top. I still own shares in Under Armour today. And I almost never sell like that. But I saw a very clear deterioration in the business paired with that euphoric pricing and it made me paranoid, and it was a paranoia that I couldn't quite shake.
Gardner: Wow! And this was, maybe, your biggest holding, one of your biggest holdings?
Bush: This was a top three holding.
Gardner: And you shaved 90% of it off right before the fall.
Bush: Right before the fall!
Gardner: You didn't drop me an email? Let me know? You probably did and I wasn't paying attention!
Bush: I probably should have, is the better answer.
Gardner: I owned the stock all the way through, but I've never shaved the position, and as a consequence, I haven't done nearly as well as you have, Aaron.
Bush: Well, I would say, this is one of the rare times where I timed it well on both sides, buying right in the middle of the financial crisis and being able, in a rare stroke of timing, to be able to pinpoint where trouble was about to begin. That leads to the next chapter, where trouble did strike. A lot of those concerns that I had about how their acquisition of those fitness apps and what it means for their balance sheet and missing the ball on apparel sales and such. The company's growth did decelerate. They did face issues with some of their larger retailers. Largely since 2017, from 2015 to 2017, the stock dropped about 75% or so. Since 2017, it's been the story of them recognizing their mistakes and reorienting the business for their next phase of growth.
The story isn't over. But they are refocusing on verticals that matter most to them, focusing extra on going direct to consumer, which I think a lot of companies are doing right now. You see that with Disney, for example. And they're ensuring that the right people are in the right roles. You see some leadership shakeups.
Now, I think a lot of this could have been done earlier. But I do think it is a promising sign that they are willing to admit their mistakes and correct for the future. And as I mentioned, I still do remain a shareholder. Whatever the next chapter is, I do think that Under Armour will be able to hit new all-time highs. I think the company will look different. It might take some patience, but I think it could very well happen.
Gardner: All right. So how about the one-line takeaway then, the didactic instructive moment for all of our Rule Breaker Investing listeners?
Bush: Think for yourself and stay ready to evolve as an investor.
Gardner: I have to vote for that, Aaron. Thank you for sharing that story! A little bit of pattern recognition. I mean, you're describing it as luck. But before I let you go, are there ways you can map what happened there into a more generic or abstract lesson that you can make us all a little bit smarter and have our eyes on something?
Bush: I think a lot of times -- and Peter Lynch is probably the most renowned for saying this, -- just look around in your own life. I think you'll be surprised by what you see, new brands popping up, new services, new products that you're interested in. And a lot of times, especially if you're more an early adopter, you can also become more of an early investor in those companies as well. And there's significant upside.
I don't think there are as simple of heuristics for when to sell, especially when companies look like they're excelling. I mean, I will stick with what I was saying. Just think for yourself. A lot of times, the herd moves in both ways. It moves toward being really against something to being really for it. And a lot of times, when the herd is super for something and you can start to look at the numbers that things are breaking apart a little bit or you disagree with the strategy, don't be afraid to think for yourself. Sometimes it pays off.
Gardner: All right, the stock was Under Armour. The title of Aaron's story, "I Will Protect This Portfolio," which you did, Aaron. Thank you again for the lesson! Think for yourself! Stay ready to evolve!
Bush: Thanks, David!