UA vs NKE

Someone has explained nicely why I don’t own either NKE or UA. Me neither!

Sorry, I shouldn’t have been so flip, but I guess I just couldn’t resist. But this is supposed to be an educational board, so here goes. Most is straight from the FAQ (Post #7062).

Why I’m not in NKE
• I especially think of stocks growing at 30%-60% a year, and selling at 20 times earnings, as very secure because they have a big cushion. [Post 6092] (Nike Is no longer a fast grower)

  • I look for a company that has a long way to grow. A company that I can hope will be at least a 3 bagger and maybe a 10 bagger.

  • That means a company that has a long runway, that ideally can grow almost forever. What I mean is a company where the addressable market is so big that their share of it allows them to keep growing for the foreseeable future. That’s no guarantee that they will, but it’s better than a company that already has 40% of it’s total available market, for instance, and can only double once.) [Post 6]

  • How do you know when a company is too big? Let me try some answers off the top of my head.

First, Look at SKX. Their market cap is less than 1/20th of Nike’s so you can easily imagine it doubling and doubling again, and if Nike just rises 5% to 10% per year with the market, SKX will still be under 15% of their market cap. On the other hand, can you imagine NKE doubling and doubling again? It’s impossible. They already have most of the market.

Now to generalize that: If a company owns just 5% of a market, it has a lot of room to double and keep on doubling, especially if the market is growing too. If the company already has 80% of the market, all that it can grab is the other 20% of the market (which is unlikely, anyway). If a company has most of the market because it just invented the market and has first mover advantage, and the market is hardly penetrated, it has plenty of room to grow (think Apple 10 years ago and the first iPod/iPhone). If it’s an old market and is saturated, that’s a different story. (I haven’t followed Starbucks, which you asked about, and don’t know how saturated their market is, but my guess is that they would have been a better buy a number of years ago than they are now, and that the coffee shop market doesn’t have too many doubles left.)

Finally, there is the problem of big numbers. If you have a chain of 200 stores and you can add 50 a year, the first year you add 25%, but the same 50 stores only adds 20% the second year and 16.6% the third year, etc. To maintain the same growth rate, you have to add a larger number of stores each year, and you run out of places to put them.

If you have another kind of firm, with $100 million in sales, and double it, the next year you will need to add $200 million to maintain the same rate of growth, and $400 million the next year, and it soon becomes impossible, except in rare cases.

Why I’m not in UA
• I especially think of stocks growing at 30%-60% a year, and selling at 20 times earnings, as very secure because they have a big cushion. [Post 6092] (UA is at some indecent PE ratio)

• Just out of curiosity I figured the average PE ratio of my eight biggest positions. These are rapidly growing companies but the average PE was 20.1. (This was back at Post #3943). Note that that goes against the Rule Breaker idea of picking overpriced stocks, or even ones with no earnings. Companies like Zillow, with a PE over 200 or something, may do just fine over the long haul, but I’ve decided “Not for me.” If I can find a rapidly growing stock with a reasonable PE, why buy expensive stocks where you hope they’ll grow into their price? [Post 3943]

I think that when UA is 5 times bigger, its PE could easily by 5 times smaller, because of slowing growth, giving you no increase in stock price at all. I’m not saying that would happen, but it’s certainly a very possible outcome.

I can buy Skechers, currently growing earnings MUCH faster than UA, at a price that is MUCH cheaper. At the midpoint of their outlook for the quarter just finished (which they are sure to beat), they will make $1.00 for the quarter, have trailing earnings of $3.42, and (with the current price of $71.50), have a PE of 21 !!!

Why would I pay 90 times earnings for slower growth than I can get for 21 times earnings? Just for hype? Hardly seems worth it.

Saul

For FAQ’s and Knowledgebase
please go to Post #7062

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I also thought Chris nicely explained why UA might not be a good investment going forward. Anyone interested in seeing the argument in detail should also look at the post Chris has linked. The basic argument against an investment in UA is that if UA moves towards becoming half as big as NKE, it would also start showing the growth characteristics of NKE, which would naturally result in a PE contraction, resulting in not so good gains to show from the stock moving forward.

None of these detract from the fact that UA is indeed a very good company and I too very much like their products.

Anirban

Sorry, I shouldn’t have been so flip, but I guess I just couldn’t resist. But this is supposed to be an educational board, so here goes.

Saul, in the same spirit, even when I agree with what you said, here is what you are missing.

Company and stock growth depend on revenue and profit growth. Each product or concept has its own “S” curve. Some companies are mono producers, they make a single product and your argument applies fully. Bur suppose a company can create several successive “S” curves? The poster child of such a company is 3M, they thrive on inventing new uses for their glue: sand paper, scotch tape, masking tape, stickies, bandages, EKG electrodes. Non of these are blockbusters but their sum keeps the company growing. 12% growth for over 40 years:

http://invest.kleinnet.com/bmw1/stats40/MMM.html

Now imagine a company that can generate successive blockbuster “S” curves! iMac, iPod, iPad, iPhone, iWatch, iTV, iCar… They are leveraging their glue, the Apple Human Interface:

https://www.google.com/search?client=safari&rls=en&q…

Intel did it with successive generations of the x86. Microsoft with successive generations of Windows. Cisco did it with acquisitions. This is the reason for paying attention to each product’s or concept’s “S” curve and to see if the company is creating or buying new markets.

For the record, I have no position in NKE or UA which I passed up for LULU because I liked the “story” better.

Denny Schlesinger

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The basic argument against an investment in UA is that if UA moves towards becoming half as big as NKE, it would also start showing the growth characteristics of NKE, which would naturally result in a PE contraction, resulting in not so good gains to show from the stock moving forward.

This is a perfectly good argument if you don’t know when to buy and when to sell the stock. If you know the growth curve, you can do both with a good degree of safety. That’s where the “S” curve comes in. You get on board when the curve in the hockey stick starts to form. That is typically one third of the company’s expected life expectancy and maybe 20% market penetration. The top comes at around two thirds of the company’s life expectancy and about 80% market penetration. By then you should have taken profits on several occasions and have taken out all the money you invested – towards the top play with house money.

In terms of Technology Adoption Life Cycle (TALK), you want to be in during the middle period. Just look at the image:

http://edbrenegar.typepad.com/leading_questions/technology_a…

Buy when the “Early Majority” is buying. Start taking profits when the “Late Majority” starts buying. Be out before only the “Laggards” are left. The P/E compression happens over the back half of the curve.

Denny Schlesinger

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Perhaps my goals are a little different, but I would not see 10% a year as a big disappointment (but I know that it is much less than what Saul goes for.)

The discussion about PE is import and and I have started to reconsider some of my highest PE stocks, which are currently:

Under Armour – PE 90 (2.5% of my port)
Facebook – PE 77.3 (5% of my port)
Chipotle – PE 48 (3% of my port)
Ambarella – PE 48 (1.6% of my port)

Growth-y wise, I would guess that Chipotle would be the slowest grower of these four. I am considering whether I should switch out of CMG, but it’s hard to say. (I have not had shares a long time.)

I am struggling a little bit with replacement stocks. I could up SWKS a little, and I could try Sketchers, and BOFI and I could perhaps add a little more to AMBA, but it scares me a little.

My lowest PE stocks are:

AFSI – PE 10
WFC – PE 13
GILD - PE 14
ORCL - PE 17
APPL – PE 17

So I have some lower PE stocks also. Most are under 30.
Now I should look at growth rates for each company. That would be fun. Who is growing the fastest? I would guess SWKS and AMBA, but who else?

Karen

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I can buy Skechers, currently growing earnings MUCH faster than UA, at a price that is MUCH cheaper. At the midpoint of their outlook for the quarter just finished (which they are sure to beat), they will make $1.00 for the quarter, have trailing earnings of $3.42, and (with the current price of $71.50), have a PE of 21 !!!

To continue this excellent learning exercise, I am interested to understand why Sketchers would have a much lower PE. I definitely understand that hype factors in here as UA has much more visibility leading to more “belief” in the growth. But it seems to me that getting that a much lower PE means that more investors do not believe in the growth for Sketchers. And I may not be phrasing that right, but just trying to understand as it seems one key aspect of your strategy is finding businesses that are mis-priced based on the expected growth and you would ease back or get out once the growth is baked into the stock price or gets ahead of itself. i.e. - you may not be in the stock for a long time unless it continues to be “mis-priced” for a long time.

Just trying to understand and compare it to some of my thinking about holding some companies I like longer term. I have owned UA for quite some time but it is a very small percentage of my portfolio. (~1%) My thinking is certainly clouded a bit since I love the products so much, but I see myself being perfectly happy long term if it “grows into NKE”. And by that I mean continues growing rapidly for a while with the PE leveling off and potentially becoming a dividend/income company later in life for me. I may not be thinking about that right, but I thought I would throw it out there for comment.

This thread is a good one for me since I do love me some UA and need to hear the other side of the story for comparison. Thanks!

Tom

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Danny,
The best explanation is distance, velocity, acceleration. Distance is just that, how far from A to B in, say, meters. Velocity is first derivative of distance with respect to time, m/sec. Acceleration is the first derivative of velocity with respect to time or the second derivative of distance with respect to time m/sec/sec. So if you are going fast AND accelerating you will go faster over the next interval of time. If going fast and decelerating you will go slower over the interval of time.
So with revenue, if quarter to quarter the revenue is increasing you have a sort of speed or velocity of revenue growth, say % increase. But if you look at the % increase in successive quarters, is the % increase increasing or decreasing? That would be the acceleration of earnings. If it begins to decelerate, that is like the maturing S curve. Revenue still growing but growing at slower rate. With the exception of some disruptive market entrant or a Lululemon-like marketing disaster, the rate of growth will slow over a number of quarters and a company becomes a slow grower or even have declining revenues.
So, in summary, pay attention to whether the q-o-q % increase in revenue is decreasing as an early warning sign (seasonally adjusted?). Slower growth = lower p/e.

KC

KC

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Thanks KC!

Denny Schlesinger

I am interested to understand why Sketchers would have a much lower PE. I definitely understand that hype factors in here as UA has much more visibility leading to more “belief” in the growth. But it seems to me that getting that a much lower PE means that more investors do not believe in the growth for Sketchers.

Hi Tom,
My understanding is that 4-5 years ago (long before I ever heard of it), SKX had an issue with a model type that they made health claims on (helps your legs or something, I never actually looked it up as it was irrelevant to my investing now). They got called on it apparently with a minor scandal as there was no proof of health benefit. Here’s what they say on Wikipedia:

In 2012, Skechers agreed to settle a class action lawsuit for $40 million based on a U.S. Federal Trade Commission complaint that it had misled customers with its Shape-Ups ads.

So, now, there is residual skepticism. That’s my guess. I don’t see any relevance to now, however. From 2012 to 2014 they increased their earnings from 19 cents to $2.99, and they increased their revenue by 53% with an acceleration in the most recent year. Companies are generally reluctant to predict what they really think they’ll make because of the estimates game, so they estimate low. If SKX hit the middle of its low estimate ranges for the first quarter, their revenue will have been up 28%, and their earnings will have been up 75%.

Hope this helps.

Saul

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Shape-Ups ads

https://www.google.com/search?q=Shape-Ups+ads.&newwindow…

Hmmm…

Denny Schlesinger

Why would I pay 90 times earnings for slower growth than I can get for 21 times earnings? Just for hype? Hardly seems worth it.

Saul,
I hear you. And your track record speaks for itself.

The question I’d ask about the 21X stock is “why is PE only 21 when it is a fast grower? Something is holding it back”

-Bill

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The question I’d ask about the 21X stock is “why is PE only 21 when it is a fast grower? Something is holding it back”

Bill, I answered the same question as best as I could in post #7380, just a few posts before yours.

Saul

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Saul,

Thank you very much for the information on SKX. Understand now why there might be a difference as UA has not had an event like that which I remember that would control the “hype factor”.

This actually reminds me a bit about the situation with GILD now as well. I know and respect your reasoning for staying out of it, but it is being held down from a PE perspective as well I think because of the pricing issue and how that might affect future earnings. Seems like it would be up your alley, but completely understand your view on treatment pricing. I happen to own both GILD and CELG and compare them often seeing CELG given the higher current PE. Although I do understand their forward PE is quite favorable.

Thanks!

Tom

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I don’t think anything residual from the SKX shape ups lawsuits is holding back the PE. I mean, that was just a bunch of laughable pseudo-fitness nonsense that they and a few other shoe companies tried to peddle a few years ago.

So, what is holding the price back? It is obviously growing earnings quickly, but I think the drag is that the business model is simple. You can sell more shoes and/or increase margins or you can’t. That is the whole story, and with how they have been executing the past few years it is a good story, but there is nothing game changing that they are doing that lets the business rocket upward. They will either keep executing the simple business well or not.
In many ways, this is a plus, because it makes their earnings easier to understand and problems will show up before you take a big stock price hit. However on the downside, it’s unlikely the stock ever goes parabolic. But I’d be happy with the continued growth and melt up in the stock.

For UA, they have a lot of research in new products. They spend almost 10% of operating expenses on R&D. They are investing heavily in wearable technology, and are partnering with sports teams, leagues, athletes, and creating new products. I’ve held this stock for years, and in spite of trimming it back a few times it is one of my bigger positions. I will admit that the price looks a bit inflated now compared to the past, and a lot of that is because of these new things that people don’t know how much value it will bring yet.
They also have a dynamic CEO who seems to be doing all the right things and Wall st seems willing to pay up for potential new revenue streams the company may monitize in the future.
While the UA core business is apparrel & shoes, there is a lot more to the long term story.

Still holding both, I like them for different reasons. May take some more off of the UA position at some point, but hesitant for now because it is in a taxable account. The trend is your friend until it ends.

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Jordan Speith’s victory will indeed cause many a YOUNG person to purchase what he wears.

Jim, I have a very good friend who has been not just a golf fanatic for over 25 years, but also a golf course architect. In fact, his passion for golf is only eclipsed by his passion for course design.

So here’s a dirty, little secret you’ll never hear from a pro golfer or a tournament host, but the fact is that gold is dying, at least in the West (though there are signs that it is beginning to show signs of life in China - maybe).

I’m just saying don’t expect that Jordan’s influence on the youth will even begin to approach that of pro basketball player or a pro soccer player or even a pro cricket player because golf may have fanatical followers, but each year their numbers are fewer than the year before. This has been true for at least the last 15 years.

It’s just one of the reasons my friend retired last year.

Thanks Denny - I was going to say the same thing (only not so succinctly) about both Apple and Starbucks (I’m long both). Since joining this board, I’ve more than once questioned my judgement about these investments. But in the face of those questions, both companies continue to defy gravity. They keep growing and their shares keep going up. Why?

I think it has a lot to do with what you said about new “S-Curves” based on new product introductions. And a second factor which you didn’t mention is a complete misunderstanding of market “saturation.”

Aside from introducing new products to existing markets, there is the growth from existing products to new markets. In particular, China, India and other Asian markets which 1) have a lot of room for growth, and 2) have populations that adore these products.

I know, anecdotes are simply anecdotes, they are’t necessarily meaningful, but with that concession, let me relate a couple of anecdotes.

My wife is from Guilin, southeastern China. Guilin has a number of coffee houses. Coffee is the hip drink of the young in China. And the western tourists also want their cup of joe. One of the largest coffee houses in Guilin was on the banks of one of Guilin’s four lakes. It was a dark place and seldom had many customers (at least when I visited). Recently, Starbucks took over this spot and opened their first Guilin location. They redesigned the space. Opened it up to provide more natural (and artificial) light (as an aside, many Chinese restaurants are poorly lit as a means of saving electricity). Even though it’s a 2nd floor location, they revised the access so it’s just easier to enter the place. As a Starbucks the exact same location which used to draw few customers is now constantly full of (mostly young) people. There’s always a line (something else the Chinese don’t do well - usually it’s a cluster rather than a queue) and it’s often hard to find a place to sit. Draw whatever conclusion you want from that story.

Anecdote number 2. My most recent trip to China (last December) included a layover in Guangzhou enroute to Guilin. Sitting at the gate, waiting for our flight, three sharply dressed, young Chinese men sat down across from me. I couldn’t help but notice that all three of them were very conspicuously using there gold iPhones. In fact one of the young men had two gold iPhones, a larger on and a smaller one, I assumed a 6 and a 6+. Let me point out that China Mobile is only making the iPhone available in locations where they have rolled out 4G-LTE which is really very limited at this time. Again - just a story, you can make of it what you will.

But it is undeniable that both Apple and Starbucks are aspirational brands in China - and they are affordable. Not easily affordable, but within reach for many. With the iPhone, maybe once every couple of years. With Starbucks, maybe once every couple of weeks. But the Chinese are very status conscious, it’s worth it to blow several months salary on an iPhone. It’s worth it to be seen sipping a latte at Starbucks.

I’d venture there’s a lot of growth available for both these companies.

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brittlerock,

Aside from introducing new products to existing markets, there is the growth from existing products to new markets. In particular, China, India and other Asian markets which 1) have a lot of room for growth, and 2) have populations that adore these products.

This is also the basis for my investment in both SBUX and AAPL. With respect to AAPL, I can say that countries like India and China offer immense opportunities.

I like to use McDonald’s as a comparison to understand SBUX’s potential. There are about 15,000 McDonald stores in the US. MCD opened its first stores in China in 1990. Today, they have over 2000 stores in China. In India, MCD has about 350 stores with plans to open 1000 more stores over the next decade.
http://www.bbc.com/news/business-30115555
I believe MCD will open many more stores in China as well.

Starbucks has about 12,500 stores in the US and about 1700 stores in China. They only have 40 odd stores in India and India’s youth is really big on coffee. India is a new market for SBUX and it has partnered with Tata Beverages; this is an excellent partnership. SBUX also believes that China could easily be their #2 market behind the US. So, at least I see much potential for SBUX over the next decade.

With respect to Apple, in addition to the growth opportunities in emerging economies, we need to remember that Apple is possibly the leader in creating new human computer interaction experiences. In fact, I believe one of the reasons Apple has been wildly successful is their ability to under Human Computer Interaction much better than any other existing or prior IT and/or consumer electronics company.

With respect to UA, it could possibly be that they are able to conquer new markets (e.g., international expansion is a big one for them) and essentially carve a niche that propels them into being the next Nike. I guess wearable tech could be something they end up using to create a significant differentiator. May be, they need to tie up with cricket players to grab a big slice of the Indian market. Right now, I just find the PE to be extremely rich …

Anirban

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In fact, I believe one of the reasons Apple has been wildly successful is their ability to under Human Computer Interaction much better than any other existing or prior IT and/or consumer electronics company.

I was an Apple reseller as far back an 1980. The Apple II was a very well done machine but traditional in most senses. The Macintosh was the game changer. Here is what Nicholas Negroponte, head of MIT’s Media Lab, had to say in 1995:

Understanding computers is about as easy as understanding a bank statement. Why do computers (and bank statement) have to be so needlessly complicated? Why is “being digital” so hard?

They don’t, and it need not be.

The GUI improved enormously starting around 1971 with work at XEROX and, shortly after, at MIT and a few other places, and it culminated in a real product a decade later when Steve Jobs had the wisdom and perseverance to introduce the Macintosh. The Mac was a major step forward in the marketplace and, by comparison, almost nothing has happened since. It took all the other computer companies more than five years to copy Apple and, in some cases, they have done so with inferior results, even today.

being digital by Nicholas Negroponte, 1995.

I’ve been a programer since 1960 starting with IBM. When the Mac came out I got a copy of the original version of Apple’s Human Interface Guidelines which then was part of the Macintosh technical manual, a telephone book size work printed on the same kind of paper as phone directors are. Much has changed in 30 years but the basic principles of Apple’s Human Interface has not changed. As I said in a prior post, that is Apple’s secret sauce which is delivered via a long list of iProducts.

Denny Schlesinger

I got to know Apple’s Human Interface Guidelines well, we developed a desk accessory that we hoped to sell to Apple:

Help Documentation System Review
By Denny Schlesinger, President, Help Software, Inc.

The Importance of Documentation

I believe that the secret of the Macintosh revolution is based mainly of two things: an easy to learn, nonthreatening, graphics based interface, and consistency in applying that interface to each new Macintosh application. The one missing component–until now, that is–has been a way to create consistent on-line documentation.

http://www.mactech.com/articles/mactech/Vol.03/03.11/HelpSys…

Unfortunately our product didn’t catch on. Apple was of the opinion that featuring a help system would undermine the image of an easy to use computer so we got little help from them. That changed in time but too late for us.

:frowning:

Being Digital by Nicholas Negroponte (Author)
http://www.amazon.com/Being-Digital-Nicholas-Negroponte/dp/0…

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that change from golf to gold threw me for a second

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I was at the Seattle Mariner game last night. I noticed that their best young player, Kyle Seager (27), was wearing UA shoes (and as it turns out, batting gloves too). Last year he signed a 7 year $100 million contract with the Mariners. Incidentally last night he had a single, a double and 2 walks.

Maybe all of the brands sign young up and comers, not sure. But this is a lot like the Speith signing to me.

FWIW I don’t hold much UA, sold half of what I had last week and am down to 1%.