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Under Armour is cheap! (yes, I said cheap)

By: Nicole Urken | 03/27/14 - 06:26 PM EDT

NEW YORK (TheStreet) - In repeated posts, I have discussed that the athletic apparel space is a sweet spot within apparel. First off, there is less competition (read: less names). While Nike (NKE) is the behmoth in the space, there is a huge runway of growth for some of the junior growth names. Plus, these names are shifting from just "athletic apparel" to real "lifestyle brands"-- fitting into the theme of healthier living and anti-obesity. Not to mention that a well-fitting and quality brand yoga pant is the new "Chanel logo" of 10 years ago-- status symbol alert. And, by the way, we have the upcoming Olympics and World Cup as additional catalysts driving sales not only for athletes but fans.

Now, of late, there has been a lot of bearish sentiment around Under Armour (UA) because of its high valuation. Case in point: Sterne Agee downgraded the stock on valuation, pointing to its 65x forward P/E multiple even though it believes the long-term growth is intact.

First off, traditional P/E multiples are not often appropriate for growth companies. We know this from looking at the likes of Amazon (AMZN) which diminished the importance of profitability entirely while investing in growth. We see this from many recent IPOs that are being valued on a revenue basis and "market potential basis." So why not take this view with an established, yet still junior growth retailer like Under Armour? 

Take a look at Coach (COH). While this name hasn't been favored of late, it was one of the top performers in the last decade. It was trading at 80x in 2001. If you bought it then, you could have earned 15% annual return through end of 2010. Not too shabby. What if people pointed to that multiple then? The earnings estimates aren't keeping up with the real growth, and if you wait until the stock became cheap, you are too late. In fact, based on some great work and analysis by Credit Suisse, growth names gave the best annualized share price return in their initial years (Nike = 26% annualized price return in first 12 years, Tommy Hilfiger = 36% annualized in the first 8 years as examples).

Now, Nike has a market cap of $65 billion. Under Armour? $12bn. While there is no question that Nike is the behemoth, it is 5x the size of Under Armour! That means huge opportunity, particularly as the latter focuses on its technological innovation and also turns up the female opportunity. Yes, Lululemon (LULU) looks to have bottomed, particularly as lackluster results today resulted in the stock price rising, but it is being more directly threatened by Gap's (GPS) Athleta and more limited selection and price point. Under Armour is the way to go, and the bit of the pullback we've gotten of late (which are few and far between) is a great buying opportunity.

Oh, and not to mention the footwear roll-out will also be key. Watch out for Finish Line's (FINL) earnings tomorrow morning-- it and Foot Locker (FL) have been on fire.

--Written by Nicole Urken in New York.

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