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Basketball Star’s Comments Move Market Into Trading Zone

Basketball Star’s Comments Move Market Into Trading Zone

There was a time when only economists and large brokerage firm analysts could move the stock market. In September 1929, for example, Yale economist Irving Fisher told The New York Times that “stock prices have reached what looks like a permanently high plateau.”

Fisher was famously wrong. Just ten weeks later, the Dow Jones Industrial Average was almost 50% lower and the Great Depression was underway. Stocks would decline for another three years.

Investors who bought based on the idea of Fisher’s permanently high plateau would need a gain of more than 800% to get back to even from the 1932 lows. In 1954, 25 years after Fisher’s observation, they’d be back to break-even.

Other Observations Have Fared Better

Market analyst Joe Granville had more success. According to Robert Shiller, Granville’s market calls were cited as the cause of large market moves in the Dow on April 22, 1980 (a gain of 4.05%) and on January 6, 1981.

Elaine Garzarelli, now the President of Garzarelli Research, Inc., had great success in calling market turns while she was a partner and managing director at Lehman Brothers.

Source: Garzarelli.com

In 1998, according to the book Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing by Hersh Shefrin, Prudential Security’s Ralph Acampora made an amazingly accurate market call in 1998 and was blamed by many for single-handedly causing a market crash in August of that year.

At 11 Eastern time on August 3, Acampora placed a call to the brokers throughout the Prudential system that stocks were in a cyclical bear market. That day, the Dow dropped 299.43 points.

Later that year, he had told an interviewer, “I feel like Monica Lewinsky. People don’t like the message. They’re saying, “You caused a 300-point decline.” But it’s really amazing how closely the public watches this. It’s become a national pastime. It’s due partly to the exposure on TV, the media.”

The list could go on to include Nobel Prize Winning economist Robert Shiller, legendary technical analyst Martin Pring and many others. But, now the list includes basket star Kevin Durant, proving Acampora right that stocks have become a national pastime.

Kevin Durant: Market Analyst?

Kevin Durant is a professional basketball player for the Golden State Warriors. He has won an NBA championship, an NBA Most Valuable Player Award, four NBA scoring titles, the NBA Rookie of the Year Award, and two Olympic gold medals. He has played on eight NBA All-Star teams.

That’s an impressive resume but on Tuesday, he turned his attention to basketball shoes and the stock market took notice.

Shares of Under Armour Inc (NYSE: UAA) dropped more than 3% percent after Durant said young players do not like the company’s shoes. “Nobody wants to play in Under Armours. I’m sorry. The top kids don’t because they all play Nike.”

Sportswear companies pay star athletes like Durant millions of dollars to endorse their shoes. Durant is under contract with Under Armour’s rival, Nike (NYSE: NKE). He signed with Nike in 2014 and reports at that time indicated he turned down a 10 year, $285 million deal with Under Armour.

Warriors teammate Stephen Curry has a multimillion dollar contract with Under Armour that includes an equity stake. Asked if he had spoken to Curry about Under Armour shoes, Durant said, “Everybody knows that. They just … nobody don’t want to say nothing.”

Can Under Armour Recover From Durant’s Trash Talk?

Under Armour has been a pioneer in “athleisure” fashion. But, in recent months, as the fashion trends have been changing trends, the company has faced a struggle to attract shoppers with new offerings. The company recently announced job cuts and store closings in response to the sales slump.

Sales growth has been slowing for some time. Not surprisingly earnings growth slowed as well. Most troubling from a long term perspective is that the company’s profit margins and other financial ratios have declined.

Under Armour’s net profit margin was 7% in 2013. In the most recent twelve months, Under Armour’s net profit margin has fallen to 4.4%. Return on equity and liquidity ratios have also moved sharply lower over the past few years.

Financial performance explains the action in the stock. UAA has declined almost 70% in the past two years.

Analysts expect the sluggish financial performance to continue. They expect earnings per share (EPS) growth averaging just 5% over the next five years. This is less than one fifth of the average rate of 26% recorded over the past five years.

Analysts are forecasting EPS of $0.38 this year, down 34% from a year ago. In 2018, they expect an increase to $0.48 per share, still well below the 2016 level. Even after the steep sell off, these estimates indicate UAA could have more room on the downside.

A Specific Trading Strategy

The stock is priced at more than 30 times next year’s expected earnings. On average, company’s in this industry have traded with a price to earnings (P/E) ratio of 18.9 over the past five years. That level would provide a price target of about $9 for UAA.

Given the fundamental outlook for the company traders considering a position in UAA should look for strategies that benefit from a price decline.

One strategy that can be used is a bear put spread. This strategy consists of buying one put option to benefit from the expected decline in the underlying stock, and selling another put option with the same expiration date, but with a lower exercise price, as a way to offset some of the cost.

This type of trade generally profits if the stock price moves lower. The potential profit is limited, but so is the risk should the stock unexpectedly rally.

For UAA, a very short term trade is possible. The bear put spread can be created with options expiring on September 8. This is about one week. Traders may find that repeatedly making very short term trades can help them generate significant profits over time.

For UAA, the September 8 $17 put could be bought for about $0.80, or $80 per contract since each contract covers 100 shares. The September 8 $16 put could be sold for about $0.20, or $20 per contract. This contract will require $60 in trading capital to open, the difference between the premiums of the put options.

The maximum possible loss with this strategy is limited to the amount of premium paid to open the trade. That is $60 for this trade. This loss will be realized if UAA is above $17 when the options expire next week.

The maximum gain is also limited with this strategy. That is generally true for any spread options strategy. A spread strategy involves using multiple contracts, buying and selling the contracts to create exposure to a stock while limiting the risk of the position.

For this trade, the potential gain is limited to $40. That is the difference between the exercise prices of the options less the premium paid to open the position. The maximum gain is realized if UAA is below the lower exercise price, or below $16 in this case, at expiration.

The potential return on investment of $40 is equal to 67% of the amount of capital risked. This is a large reward for a trade that will only be open about a week. Repeatedly following strategies like this can allow small traders to increase the value of their accounts while limiting risks on each trade.