Monday, April 2, 2012

UA: New tech skin touch

Under Armour Inc. (UA) makes underwear and sportswear with the emphasis on new-tech fabrics that control airflow and moisture. The Baltimore, Maryland company makes the most intimate and mundane of clothing items, but with a decidedly 21st century twist.

Its market is dominated by North America, although it does have some sales in Europe and East Asia, last year opening its first store in China.

I use Under Armour products. It turns out that airflow and moisture control are important not only to young athletes, but to active old people as well. That gives Under Armour's new-tech approach to skin-touching clothing a very broad market indeed.

Under Armour had one of the most bullish charts among 25 stocks added over the weekend to the Zacks top-buy list. The final four were all more or less equally bullish. What recommended UA was a good selection of options with high open interest.

UA began its most recent leg up at $72.31 on Jan. 5, rising to an all-time high of $99.35 on  March 26 before faltering. The correction carried the price down to a low of $91.65 on March 29, and the price has since bounced off of that low up to a high today (so far) of $96.46.

The cautious trader will wait for a break above that prior high ($99.35) before opening a position; the speculator will enter on the basis of today's upside moment, the first intraday rise since the correction began.

UA shows a return on equity of 17%. The company carries long-term debt equal to 12% of equity, which is quite low. Basically, UA isn't a growth stock but could be if it brought its return on equity up to 20%.

Institutions are treating as an up and coming stock. They own 83% of shares, and they have bid the price up so that it takes $3.32 in shares to control a dollar in sales.

Quarterly earnings show a seasonal pattern, with the third quarter being the peak. Q3 earnings have risen steadily in that quarter on a year-over-year basis.

UA's average volume is 683,000 shares. Next earnings will be published on April 30. As I mentioned above, there is an excellent selection of options, with good open interest and bid/ask spreads that are on the narrow side for a stock trading less than a million shares a day.

Implied volatility has been rising since mid-March, although, at 36%,  it still stands at historically low levels. Even so, that is well off the lowest low of 31%. Options pricing suggests that there is a 68.2% chance that the price will close between $86.25 and $106.35 a month from now.

Decision for my account: I like the chart, financials and story -- and the options are OK. The biggest question is whether to play the options long, because of rising volatility, or short, because I expect volatility to fall.  

I'm opting for short because I expect the price to rise, which means falling implied volatility. I'm breaking my rules and going for an April bull put spread. The credit difference between April and the by-the-book month of May is quite small.

I've opened a net-credit bull put spread for April expiration, short the $95 strike and long the $92.5 strike.

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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