Jumping on Under Armour (UA) Calls

In yesterday’s Tematica Investing we examined the August quarter results of athletic apparel and footwear titan Nike (NKE). The bottom line was it was a low quality earnings beat, but we saw enough reasons to be patient with the shares amid a continued rise in athleisure tide and longer-term margin enhancing moves. As we noted, Nike made little comment on the competitive landscape, which is tightening, not only in Europe, but also here at home.

One of the companies that is gaining market share in Western Europe, China and in the US is Under Armour (UA), another Tematica Investing holding. Not only is UA gaining share in those markets outside the US as part of our Rise & Fall of the Middle Class investing theme, but also in the US given its developing relationships with Foot Locker (FL), Finish Line (FINL) and Kohl’s (KSS). UA is tracking to be roughly half of all Foot Locker and Finish Line locations, as well as all 1,100 Kohl’s locations beginning this December.

While UA’s new Under Armour Sportswear line has been the subject of headlines in recent weeks, it’s this greater retail penetration taken from the Nike playbook that is the real story to watch in the coming months. We also see better petroleum input costs helping margins in the coming months.
To capture the benefit of this expanding retail presence during the seasonally strong shopping season, we are making the following move:

• Adding the Under Armour (UA) January 2017 $50 calls (UA170120C00050000) that closed last night at $0.35.
• We see enough upside in the coming months to add the calls up to a price point of $0.50.
• Because this is a new position, we are holding off issuing a protective stop loss at this time. 

Checking in Our Amazon (AMZN) Calls

Over the last week, one of the strongest performing stocks has been Amazon (AMZN). Over the last five days those shares have climbed 4.94 percent, which has made them a great performer for the Tematica Investing Select List, but we’ve seen a more significant move in the AMZN January 2017 $800 calls (AMZN170120C00800000)  that we added to the Tematica Pro Select List last week. Based on last night’s closing price, those AMZN calls reached $64.72, up 50 percent week-over-week.

What’s been driving the underlying AMZN shares higher? 

A few things, as Amazon tends to be a busy company, but we suspect it was the very bullish holiday spending forecast released by eMarketer. According to eMarketer’s holiday sales preview forecast, total retail sales will increase 3.3 percent in 2016 vs. 2015 to $884.50 billion. Holiday retail e-commerce sales will jump to $94.71 billion, representing 10.7% of total holiday retail sales — a new high. Helping add weight to that forecast, Nike shared that in its latest quarter it’s online direct to consumer revenue rose nearly 50 percent year over year.

We continue to see Amazon as a prime beneficiary of the accelerating shift to digital shopping. Following the strong move in the Amazon January 2107 $800 calls, we would not recommend scaling in at current levels. Given the higher degree of market volatility during the month of October, we’re holding off installing a protective stop loss at this time. The bottom line on these Amazon calls is we are along for the ride as Amazon continues to take consumer wallet share.

While we may not be inclined to scale into those Amazon calls at current levels, we’ve seen the Consumer Discretionary Select Sector SPDR ETF (XLY) January 2017 $85 calls (XLY170120C00085000) retreat 17 percent vs. last week. Remember, the largest holding in the underlying ETF is AMZN shares and more than double its next largest position. Therefore, we’ll do the following:

• Use the inherent disconnect to our advantage and double down on the Consumer Discretionary Select Sector SPDR ETF (XLY) January 2017 $85 calls (XLY170120C00085000). 
• As we do that, we’ll be setting a protective stop loss at $0.20. 

With tomorrow’s market close, we shut the books on September and 3Q 2016, which means that before too long we will have yet another earnings season upon us. As we prepare for that rock and rolling good time, we’ll continue to kick the tires on new positions for the Tematica Pro Select List.

SUMMARY OF ACTIONS FROM THIS POST:

• Issuing a Buy on Under Armour (UA) January 2017 $50 calls (UA170120C00050000) that closed last night at $0.35 up to a price point of $0.50 per call. We are holding off issuing a protective stop loss.
• Doubling down on the Consumer Discretionary Select Sector SPDR ETF (XLY) January 2017 $85 calls (XLY170120C00085000) that closed last night at $0.39. As we do this, we’ll be setting a protective stop loss at $0.20.