Temptation Under the Armour

OK, so I have a bit of a tendency to buy popular growth stocks on pullbacks -- if I believe the growth story, my knee jerk reaction is often to pick up a few shares or a few call options when what appears to be a temporary setback brings the share price down.

This is what happened when I doubled my Google holdings at $510 or so when their earnings disappointed slightly. And though I haven't gotten around to writing about it yet, this is the same thing I did with Apple recently when the "sell the news" drop hit AAPL shares when the iPhone price cut freaked everyone out and let me pick up shares in the mid-$130s (perhaps it's for the best that I didn't write about it ... who on earth wants to hear yet another blogger talking about Apple, by far the most popular stock for online discussion? I can't say that I have anything new to add to that debate).

And I'm tempted again -- this time for a stock that I had derided for quite a while even though it's a "local boy makes good story."

This time, it's Under Armour -- founded just down the road from me by University of Maryland grad and mediocre football player Kevin Plank, who has turned out to be an excellent marketer and athletic clothing trendsetter.

I thought Nike would chew them up and spit them out, and that the introduction of the compression clothing and other Under Armour specialties by Reebok, Nike, and others would kill the market for this young upstart. Clearly, I was wrong ... at least so far. They have created a powerful brand in just a couple years, and they are probably causing Nike to panic a little bit with their entree into footwear. Nike was built on the running craze of the 1970s and the basketball golden age (also called the "Michael Jordan" age) of the 1980s and early 1990s. Perhaps Under Armour will be the first company to successfully build an athletic brand with mass appeal that's based on football, the sport with the broadest appeal.

I don't really know if they will succeed, but the latest share dip has me considering a purchase. In the short term, here's my logic:

The shares were downgraded in the middle of last week by an analyst at UBS lowered his rating and price target. But the real thing that caught my attention was this:

They lowered the price target because of weather.

Now, I'm the first one to laugh when any kind of company, especially a retailer, blames the weather for poor results. If Under Armour had released earnings and blamed the lack of a cool September for flagging product sales, I might find any resultant dip to be a buying opportunity, too ... but I would probably find it easier to resist the temptation, because I would lose a fair amount of respect for management.

So essentially my point is this: When an analyst gives a weather-related excuse for a short term possible sales dip, I get very tempted to buy. When a company gives that same excuse, I am more likely to make fun of them. Or at least, to take advantage of selling by investors who believe that one month's sales makes or breaks an investment.

Weather happens every year -- warm weather, cold weather, it all evens out in the end. If Under Armour needs a few cold days to spur sales of some of their garments, I am absolutely certain that those cold days will eventually come. If they come in October instead of September, I can live with that.

I haven't talked at all about the reasons I still am cautious about Under Armour -- man oh man are the shares expensive -- the forward PE, weather or no weather, is still 45, which is pretty big for a company that the analysts think will only grow earnings by about 30% next year. And the share price did fall back by 8% or so on the downgrade, but we're still up near the all time highs for the stock. Analysts have not consistently lowballed the earnings, so you can't say that they always blow out their estimates, either -- they did last time around, but the analysts were prety close in the two quarters before that.

So this is really about faith in a brand, and a vision for long term growth. Under Armour is just about a tenth the size of Nike right now, and growth that stays around 20-30% for a decade is certainly worth more than a 45 PE ... but will that happen?

I don't know ... but, short term, I'm tempted. I'd like to see some more temporary bad news hit the shares a little harder, but I just might buy a bit of this one before too long.

Full disclosure: As of this writing, I do own shares of Google and Apple, but no other companies mentioned here.

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Zune: another misstep, or an Ipod killer? (MSFT, AAPL)

I don't own shares in Microsoft or Apple, but I have looked several times in the past at Microsoft (as when I wrote about socially responsible investing), just because it has been so cheap for the past year. I've never convinced myself to buy shares, largely because I have a little bit of a bad taste in my mouth about the company and its products. Apple I don't own because I simply missed the boat.

But the world is abuzz with Microsoft's pending announcement today that they're no longer content to support devices from Iriver and Creative Labs and other partners as they have in the past, and will now be coming out with their own branded handheld multimedia device for this year's holiday season -- the Zune.

Details are sketchy so far, but the device looks like an Ipod with a bigger screen (pictures here), and word is that it will work within its own self-contained environment, with a store (like Itunes) and wifi capability for perhaps buying content online without a computer, or communicating with local friends on some sort of social song-sharing network. The AP story on today's announcement gives some more details.

Now, there's certainly room for some minor optimism here -- I'm not an Ipod owner, though I use one from time to time, and I'm probably not the target audience because I'm satisfied with the podcast receiving technology of my Palm LifeDrive (which is itself a failed product, but one that I really like).

But it seems clear that this device will try to aggressively out-feature the Ipod, and at a comparable cost (I hope for their sake that it's well below $300).

The problem is, how does a new product break in when the dominant provider has built a cult-like following and brand image, set the rules for the marketplace and created a universe of accessories and complementary gadgets, and holds a 70% share?

I think it either has to be by offering a dramatically better product that's easier to use, or by making it comparable to the existing leader, and so much cheaper that you can't resist buying it. Sandisk and the other also-rans are trying to go with the "cheaper" route so far, and I haven't heard anything to make me think they're succeeding. The fact that they're being fashion-forward by including a brown version probably isn't going to be enough ... and I'm not a web 2.0 gadfly teenager, but I can't imagine that the wifi music sharing will be enough of a feature to help them pull even with the ipod -- it seems they're trying for a network effect with that feature, but all I can picture is one sad kid hanging out with his friends and trying to Zune-share with them while they all happily and obliviously listen to their Ipods.

Frankly, I'd bet with Apple on this one even if Zune does indeed have features not available on Ipods (like wireless) and it costs less for more memory (which isn't necessarily going to be the case). After seeing Microsoft products come out time and again, from successful ones like the Xbox to flops like Origami and the Tablet PC, I can't believe that they're suddenly going to figure out how to design a streamlined, user friendly interface for anything -- I expect we'll see another product that is top-heavy with features but difficult to operate.

And with the head start that Apple has with developing partnerships for selling online video and movies, Microsoft is going to have to fight tooth and nail just to develop a library as strong as Apple's, let alone stronger.

But one thing does intrigue me: As with Xbox, Microsoft is most likely willing to take huge losses on this in order to break into the space. One of the rumors (from Engadget in July) is that Microsoft will scan your Itunes purchased library and give you all of those songs for free on the new Zune device, essentially subsidizing your switchover and getting rid of at least one hurdle that switching consumers would face (since both Itunes and Zune-sold music and video will be proprietary -- that's an assumption for Zune but a reality for Itunes, no one with a large paid-download library would want to switch otherwise).

That's the only thing that might speed up any kind of volume in customer switchover from Ipod, in my opinion -- otherwise, they're just competing for all the customers who don't have an Ipod now. I think anyone who is thinking of buying an Ipod right now will continue to want an Ipod -- if they're that late an adopter, there's no reason to expect that they'll choose instead to buy a device with more complicated features and a lack of available user groups to exert peer pressure.

I still think Microsoft is an undervalued company -- but only because I think the impact of Vista on Microsoft and the whole PC value chain is going to be immense over the next year and a half (assuming that Vista ships in working order and does what they say it will). I might buy Microsoft to get exposure to Vista, but not to get a piece of Zune.

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