Monday, September 21, 2015

Path of a Stock Purchase: from Discovery to Ownership

If you're a regular reader of this blog, you know I've written before about the process of stock buying-- Awareness, Identification, Study, Screening and so on. Each of these is necessary in the disciplined and measured business of choosing companies whose stock is more valuable than your hard-earned dollars. After all, we spend our incomes primarily on products and services which are consumable: food, tuition, cars, clothes, travel, entertainment, furniture and so on. We purchase a thing, we use the thing, and when it wears out or fashions change or enough time passes, we replace it. For most of these things the value decreases following purchase-- your car depreciates rapidly; that cheeseburger is worthless as soon as after dinner. Obviously.

Investments are different. They are to be bought and held, and their value should increase over time, or they're not good investments. So unlike a shirt or a couch, we want investments which will last, which will grow in value substantially over the years and help us one day to pay for something else, like your kids' education or your retirement or a great vacation.

So what we choose to buy is more important here than anywhere. We want certain kinds of
companies, involved in certain kinds of business and leveraging certain long-term trends.

Today I'll take you through my decision to buy Under Armour (UA) in February 2014.

Under Armour's original compression
"performance" shirt
I am a fitness enthusiast, for lack of a better term. I wear workout gear often and I'm tough on it, so it seems I'm always shopping for replacement shirts, shorts, shoes and all that. About 12 years ago I bought an Under Armour brand "wicking" compression shirt because looked sleek (on the mannequin), made bold performance promises, and was discounted to just over 1/2 the price of my then-favorite workout t-shirt, made by Nike.

I was immediately impressed as I wore the shirt. It kept me cooler exercising even in the summer in a health club without air-conditioning. It was comfortable and fairly flattering and even stayed pretty dry during a hard workout. Within a couple of months I had purchased two more. A few years later I found the company also made underwear and socks and shorts out of the same high-tech material. Nike's various products slowly got replaced in my dresser drawer.

I liked the gear so much that I started to research the company. I read the terrific Founder/CEO story of Kevin Plank and his days on the University of Maryland football team. I learned that the company's market cap was under $1 billion and that their products were often favored by pro athletes-- which I took to mean they were very high quality. Their gear was generally a little pricey and rarely went on sale, both of which usually means big profit margins. But they had little name recognition and even less shelf space at major sports retailers. It seemed Under Armour was a good business making great products, but was focused on a niche market so was not necessarily a great investment. Yet.

By 2013, however, things had changed. The company had begun sponsoring athletes I knew and liked: World Cup and Olympic skier Lindsey Vonn, rising Golden State basketball point guard Steph Curry, and superstar Superbowl quarterback Tom Brady. They had landed a deal to make competition suits for the US Olympic Speed Skating Team. They were advertising on TV. I was seeing a lot more of their logo in the gym. My kids wanted UA-branded sweatshirts for school. They were making shoes for soccer, running, and basketball. UA had gone mainstream and things were taking off for the company.

I started looking seriously at buying shares. The financials looked good: high profit margins, low debt, rapidly growing sales. The market cap had risen to over $15 billion in 2012 but the stock had taken a hit due to some analyst concerns regarding high inventories-- generally not a value-deterring issue-- and share prices were now discounted around 30%. Which started to look like a great value, given that its similar-sized competitors-- Adidas, Puma, Reebok, Lululemon-- were showing stalled growth, while Under Armour's revenues were climbing 25% or more per year. UA was shaping up to be the only company prepared to go toe-to-toe with sports apparel behemoth Nike. It was time to get in.

It wasn't the UA suits
In February 2014, following bad press regarding UA's speed skating suits and another small stock drop (the US team's poor showing in the Sochi Winter Olympics was later shown to be unrelated to the suits), I bought shares. My decision to finally pull the trigger was careful and methodical, but my timing was astonishingly lucky: in the 18 months since, those shares have doubled in value, a 67% annualized rate of appreciation. UA is already the largest stock position in my portfolio.

I can't expect my ownership stake in Under Armour to continue to grow at that rate, as it is almost certainly unsustainable for a company that size. But that's okay, I'm planning to hold the shares for a long, long time and Under Armour has lots of ramp ahead of it: so far they've only got a tiny piece of the multi-billion-dollar US basketball apparel market, and they're only beginning to catch on overseas. In the meantime, I make a point to buy Under Armour products whenever I can-- I can be my own brand ambassador, I like the products, and at least a few fractions of a penny of everything I buy goes back in my own pocket as dividends, because I own part of the company!

From time to time I will revisit the subject of stock selection, start to finish, using one of my own positions as an example. Until then ...

Please write me or tweet with questions or comments. I welcome the feedback as I work to make this blog a more helpful and easy-to-use resource. It is my goal to respond to you within 24 hours.

Drifting to Fifty | Random unrelated nugget of the week

Eat less. It's harder than it sounds of course, but it's just that simple: put less food on your plate and have fewer, smaller snacks. Make up the gap with a glass of water. In a few years, you (as well as your doctor) will be grateful you started this practice when you did, and you'll wish you had been stricter earlier.

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