Peter Lynch said, "Bottom fishing is a popular investor pastime, but it's usually the fisherman who gets hooked." Under Armour (UAA 1.22%) (UA 1.17%) seems like a perfect example of the proverbial falling knife. But fortunately for investors -- including the dozens of hedge funds who've bought into the athleticwear maker's  shares -- its turnaround story may be about to gain traction. By focusing on its own operations instead of spending millions to sponsor teams, Under Armour might become a focused performer for investors.

Protect this house by spending less

Just five years ago, Under Armour was in growth mode, having posted 26 straight quarters of at least 20% annual revenue growth. Unfortunately, poor inventory management, questionable acquisitions, and expansion into sports it really didn't understand derailed the growth machine.

During some of its best growth years, the company famously used the slogan "Protect this house" to excite customers about the brand. During the company's fast-growth phase, Under Armour committed to spending millions of dollars each year -- peaking at more than $1 billion in 2016 -- on sponsorships.

Under Armour annual marketing commitments over the last six years.

Data source: Under Armour. Chart by author.

Over  the last four years, Under Armour has reduced its commitments and it is looking to reduce these marketing costs even further . The  apparel company recently informed UCLA that it wanted to cancel its 15-year, $280 million sponsorship. According to Under Armour, it isn't receiving the benefits  of this partnership that it expected.

Football player image holding a football in full pads.

Image source: Getty Images.

The UCLA agreement was signed in 2016, at an average of about $18.7 million per year . If the company can successfully exit the UCLA deal, this would generate savings of over $205 million  over the next 11 years. Under Armour is also attempting to exit another 10-year, $86 million deal made in 2016 with the University of California, Berkeley, also known as Cal. If the Cal deal also ends, it would mean another $51.6 million in savings over the remaining six years.

Though the exact terms weren't released, Under Armour apparently will no longer be providing lacrosse equipment to the University of Maryland. On the one hand, cancelling sponsorships and equipment provisions seems like a negative. However, investors should be pleased with the result. As Under Armour cuts expenses in one area, it plans to invest these funds to drive sales and margin growth in the future.

"The Only Way Is Through"

It's appropriate that Under Armour's most recent advertising line is, "The only way is through." Changing the company is the only way to change its narrative. Late last year, the company announced that Patrik Frisk would take over as Under Armour CEO at the beginning of 2020. Frisk, along with Dave Bergman, CFO, plan on spending money "the right way."

There are three key focus points for 2020. First, the company wants to shift spending to content creation. As an example of this shift, Under Armour changed its strategy on Facebook-owned Instagram from product shots with an obvious website button, to scene shots with athletes wearing Under Armour products that can be shopped directly from the post.

Instagram boasts more than 1 billion active monthly users, so getting marketing right on the platform is important. According to research released by Shopify, 93% of buyers cited visual appearance as a key factor in their buying decisions.

Hubspot specifically called out Under Armour's competitor Nike as a good example of a successful brand on Instagram. Specifically, Nike's Instagram features athletes and other content that "promote the Nike brand personality as a whole."

The second key spending point for Under Armour this year is on product consideration. A search on the site Trustpilot suggests Under Armour has some serious work to do.

Comparison of Under Armour and Nike in Trustpilot reviews. Broken down into multiple categories.

Data Source: Trustpilot. Chart by author.

With 423 reviews for Under Armour , and 217 for Nike , it's possible there is some statistical variation between the two, yet the numbers seem clear. Under Armour needs to spend money to improve customer perception of its products. CEO Frisk acknowledged this directly by saying, "To be able to drive consideration you need to spend against the brand." The company has been limiting the number of product variations to cut down on inventory and make its supply chain more streamlined. Focusing on quality over quantity should allow the company to drive better consideration and to begin to win back trust from its target customers.

As we can see, Under Armour wants to reimagine its brand when it comes to marketing on social media, which should improve customer perception. By cutting back on the number of styles the company offers, it can focus more on quality and potentially keep from having to discount the excess, which has been hurting margins.

Fishing for a bargain

If you're considering bottom-fishing, it doesn't hurt to have millionaires coming along for the ride. During the first quarter of 2020, 32 hedge funds  owned Under Armour stock. By the middle of the year, there were 37 funds holding the shares. Just last month, Under Armour was held by 40 hedge funds. There is no guarantee following hedge funds will generate positive returns, yet it seems to reinforce the point that this could be a stock worth fishing for.

Analysts are expecting more than 22% revenue growth  for full-year 2021 -- though that would follow a predicted 26% drop in sales for the current fiscal year.  In addition, they are calling for anemic full-year earnings of just $0.10. Demand wouldn't seem to be a problem for Under Armour, but margins are.

If Under Armour is smarter with its spending, this should lead to lower SG&A expenses. Reinvesting some of these savings into better social media content, as well as a leaner and potentially more profitable inventory position. should lead to an uplift in sales and margins. Investors willing to take a risk on a turnaround mid-cap stock should have Under Armour on their research list.