I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Under Armour (NYSE: UA). Is this activewear supplier the real thing? Let's get right to the numbers.

Foolish facts

Metric

Under Armour

CAPS rating (5 max) ****
Total ratings 2,771
Percent bulls 92.1%
Percent bears 7.9%
Bullish pitches 428 out of 477
Highest rated peers Weyco Group, LVMH Moet Hennessy, Delta Apparel

Data current as of Jan. 28.

Enthusiasm for Under Armour escapes me. I've never understood the company's competitive advantage. The clothes and shoes are great, sure, but materially better than alternatives? I don't see how; Fools think I'm not looking hard enough.

They may have a point. Last week, Under Armour easily bested Wall Street's average fourth-quarter earnings estimate. The company delivered $0.44 in profit, $0.07 a share more than analysts were calling for. Revenue soared 36%, and the stock shot up 11% on the news. This is what happens when bulls get emboldened.

"With a niche of sporting equipment that will never go out of style, unless kids, adults and the pros stop playing sports, their inventory will always have value, further strengthening their balance sheet. Under Armour is poised to take a sizable chunk of Nike's (NYSE: NKE) market share away," wrote Foolish All-Star brandongasper in October, months before Under Armour scored a huge marketing victory in college football's national championship game.

In that contest, Under Armour outfitted winning Auburn, while Nike outfitted runner-up Oregon. Each brand scored tens of millions of dollars' worth of marketing airtime during the game, but it's Under Armour that recently inked a long-term deal with Auburn. Today, it looks like a winning arrangement.

The elements of growth

Metric

2010

2009

2008

Normalized net income growth 32.2% 17.9% (21.5%)
Revenue growth 24.2% 18.1% 19.6%
Gross margin 49.9% 48.2% 48.9%
Receivables growth 28.6% (2.4%) (13.1%)
Shares outstanding (in millions) 51.1 50.2 49.3

Source: Capital IQ, a division of Standard & Poor's.

And that's not all investors have to cheer about. Under Armour has spent years putting up mostly good numbers. Let's review:

  • Accelerating revenue growth combined with rising gross margins suggests two things. First, demand is rising. Second, Under Armour is seeing pricing power in its core business.
  • Normalized net income is rising even faster. A 2008 reversed into a big 2010 gain. Growth investors like me love to see this sort of trend. When combined with accelerating revenue, it tends to reflect leverage in the business expressed as high returns on capital and even higher cash flows.
  • Yet that's not what we have here. A sharp rise in receivables and inventories has stunted free cash flow over the past 12 months. On an absolute basis, FCF fell 80% last year. This makes sense if Under Armour is gearing up for massive growth. Otherwise ... uh oh.

Competitor and peer checkup

Company

Normalized Net Income Growth (3 yrs.)

Hanesbrands (NYSE: HBI) (0.9%)
lululemon athletica (Nasdaq: LULU) 57%
Nike 5.1%
Under Armour 6.9%

Source: Capital IQ, a division of Standard & Poor's. Data current as of Jan. 28.

Interestingly, it's another Rule Breakers pick -- lululemon athletica -- that gets the nod in this table. Fools aren't as enthusiastic, but I think they're wrong. Unlike Under Armour, lululemon has a history of keeping a tight rein on inventory and receivables. Cash flow has ballooned as a result.

Grade: Unsustainable
I've never before sided with one rebel stock over another in one of these columns, so I guess you can call this a first. Lululemon enters my CAPS portfolio on the long side, as I join my Foolish colleague Rich Smith on the short side on Under Armour. Unexplained inventory bugaboos simply create too much risk at current prices.

Now it's your turn to weigh in. Do you like Under Armour right now? Let us know what you think using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email, or replying to me on Twitter.

Interested in more info on the stocks mentioned in this story? Add Hanesbrands, lululemon athletica, Nike or Under Armour to your watchlist.

Lululemon and Under Armour are Motley Fool Rule Breakers recommendations. Under Armour is also a Motley Fool Hidden Gems pick. Nike is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Lululemon and Under Armour and is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.