Which stock would you rather wear: Nike or UnderArmour?

A head-to-head comparison of a bellwether & a newcomer

With the NBA playoffs hitting full stride, sports analysts whimsically compare Lebron James to Michael Jordan. Nearly any analyst worth their salt notes the difficulty in comparing players from two different eras. Much the same, Nike grew to prominence in the 1990’s, becoming a worldwide brand synonymous with success. As the years passed, tastes changed, and performance apparel brands like UnderArmour began to take market share from these stalwarts. Recent years have decimated many brands in the apparel industry from Ralph Lauren to department stores like JC Penny. While Nike shares race to all-time highs, UnderArmour sits at ~50% its 2015 peak. However, with money to invest, which company will deliver better returns?

What The Fundamentals Say

Utilizing the fundamental data from the StockMetrix app, investors can quickly compare the financial statements in a meaningful way. At first glance, both companies suffer from declining metrics across the board on a quarterly basis. However, most apparel retailers experience extremely seasonal businesses, with Q4 holiday sales being the largest. Thus, it makes more sense to compare the same quarters year over year. Incorporating this notion, the same data shows that Nike’s operating income failed every quarter for the last three quarters to surpass its prior year. On the other hand, balance sheets do not experience the same seasonal fluctiatons. In that respect, both companies show little to like, with UnderArmour being at a significant disadvantage given its size.

However, the fundamental ratios provided by StockMetrix paint a bit of a different picture. Nike maintains a positive rating mainly driven by its positive cash flows, asset efficiency and profitability. The Return on Equity of 18.44% offsets the Return on Investment of 6.88%. UAA fails in the same analysis driven primarily by its lack of generating positive income. Furthermore, UnderArmour’s quick ratio of 1.10x and current ratio of 1.97x should make anyone question the possible solvency of the company.

Technically Speaking

Technical analysis presents an interesting comparative landscape. If a picture is worth a 1,000 words, then the charts of these two companies could write volumes.

UnderArmour appears only recently left behind multi-year lows, while Nike sits near all-time highs. StockMetrix notes that the short float on NKE sits substantially higher than history, while UnderArmour doesn’t have nearly as many people betting against it. However, that in and of itself should give investors pause. No one wants to be the one who sells at the bottom or buys at the top. Looking at the two charts, while Nike clearly is in an uptrend, UnderArmour is slowly making a turn upwards. UnderArmour chart also points to a double bottom, as well as a recent push in and through a recent area of consolidation. Such price action typically indicates a renewed interest in the company from larger players. Nike also continues to take a rocket ship higher, with no end apparently in sight.

Social Sentiment

Analysts hold a much more favorable opinion of Nike than UnderArmour. However, in a previous article, Stockmetrix noted that analysts often get it wrong. On the other hand, compiled social media sentiment holds UnderArmour in a more favorable light than Nike. Insider selling doesn’t tell us much as it shows a much larger trend in UnderArmour for selling over the past several years than in Nike. What is most telling is the institutional and mutual fund ownerships. Mutual funds have been selling Nike at a much higher pace than previous quarters, with total ownership accumulation still positive. Institutions, however, are dumping shares, with current quarter ownership change of -1.39%. Conversely, UnderArmour has seen ~13.5% gain in both institutional and mutual fund ownership QTD. This indicates an accumulation by large institutions of UnderArmour vs Nike.

So What Do I do?

With the information gleaned from StockMetrix, it’s apparent that UnderArmour is struggling to make money. Nike, on the other hand, still makes large amounts of money, and has an iconic brand that isn’t likely to fade anytime soon. It wouldn’t be a stretch to say that Nike stands on significantly stronger fundamental footing than UnderArmour. Additionally, most valuation metrics don’t work with UnderArmour because they aren’t currently making money. But, each investor’s decision they would prefer depends on the individual investor. The expected return on UnderArmour runs much higher than that of Nike, as most turnaround plays do, in part because Nike is unlikely to run much higher on a percentage basis. However, it’s unlikely to crater given the company’s global stature.

UnderArmour, in turn, could potentially double in a couple years. Yet, there is some chance the company could take a nosedive. Nonetheless, even with UnderArmour’s currently weak position, there is so much negativity baked into the stock price, that any reasonable amount of turnaround would send prices significantly higher. Investors that cannot afford to wait out the turnaround for UnderArmour, or the probable volatility shouldn’t consider the company as an investment, and would be better served waiting on a pullback in Nike. Enterprising investors that believe in a likely turnaround would be much better served to invest in UnderArmour.

In The End It’s Only About You

Neither company presents a good investment option at the moment. Nike maintains strong fundamentals, but its price already reflects a significant premium. UnderArmour faces real challenges making money in the near future. However, the stock price has been hammered, and reflects this doubt. If forced to make a decision, UnderArmour presents a better play because of the potential returns. A more prudent approach would be to wait until more information points to some solutions to their earnings issues, while assuming the stock price still maintains a discount. Conversely, any significant correction in Nike would present a buying opportunity.