Bullish View on LNKD & UA

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Brief Introduction to Stock Screening

The two stocks that are of interest to me this month are LinkedIn (NYSE: LNKD) and Under Armour (NYSE: UA). An important part of my investment technique is to find companies that stick out from the others on my stock screener. It is important to note that I have tried to customize my stock screener so that it is easy to sift through a fairly significant load of information in a relatively short amount of time.  It is hard to find (or even customize) the perfect stock screener. And although it is almost impossible to be “perfect,” Fidelity’s screening tools provide pretty sophisticated analysis capabilities. If you follow me on twitter (@stockcharm), you can see that I am a big fan of “Fidelity Viewpoints” as well.

Growth is Still Good

The investment strategy that has been most appealing to me in this early stage of a hopefully long investment career is growth investing. This is not to say that there are not plenty of opportunities in value investing or GARP (growth at a reasonable price) investing, because we all know that opportunities come in many different shapes and sizes. In my opinion, it is ultimately sales and earnings growth that drive shareholder returns in the long run. And while many other metrics should be monitored with a watchful eye, this “growth” seems to be a fundamental commonality among many lucrative investments. It is one of the major reasons why investors choose to hold on to stocks after they decline in share price; this is why I have chosen to hold onto stocks like Buffalo Wild Wings. Although growth may not exceed investor expectations at times, and ultimately be the reason for sharp short-term share price declines, my feeling is that consistent growth gives many investors a fairly high level of confidence to hold on to or even add to existing positions in the face of market pessimism.

Two Stocks in the Same Boat

Despite underperforming a vast majority of the market this past month, LinkedIn and Under Armour have drawn the interest of institutional investors. The first metric that popped out during my analysis was the percent change in institutional ownership as compared to the previous month. One could pose the simple question, “Are institutional investors buying, holding, or selling a stock?”

Turns out these institutional investors have increased their previously existing stakes in LNKD and UA by roughly 25% and 10%, respectively. To give you a point-of-reference, the market median this past month of percent change in institutional ownership was -1.33%. This means that, on average, institutional investors were pulling money out of stocks. So, common logic would suggest that LNKD and UA could be favorable investments.

Combine the increase in institutional ownership with the fact that LNKD and Under Armour shares have NOT been doing particularly well this month, and you find something else that is interesting. One might have conjectured that LNKD and UA shares would have shot up this past month due to the influx of buy orders from institutional investors. Well, that definitely did not happen. LNKD shares are down roughly 13%, and UA shares are down about 8% for the month.

Does this mean that the investors were wrong? Or does it mean that the market, in general, has not realized that LNKD and UA are good investments? My thoughts are that these institutional investors like the future growth prospects for LNKD and UA, and feel that the shares are undervalued. It is kind of hard to argue that either one of these companies’ share prices are undervalued because of their high valuation metrics, but beauty is in the eye of the beholder. “Undervalued” does not necessarily mean low P/E’s and horrible market performance to many growth investors. The terms “value investing” and “undervalued stocks” can mean different things.

Under Armour vs. Lululemon (NASDAQ: LULU)

Since Lululemon is also one of my previous recommendations, it would be fair for any of my readers to ask why I am choosing to recommend Under Armour instead of LULU. Although these are two different companies, investors would be remiss to omit their obvious similarities. Both companies sell relatively highly-priced athletic apparel and cater to younger and more health conscious crowds.

Because both companies are in the same general industry, one would suspect that macro economic factors impacting the athletic apparel industry would cause the price movement of UA and LULU to be highly correlated. While LULU shares have outperformed over 60% of the S&P 500 over the past three months by appreciating around 20% in market value, UA shares have underperformed and lost around 10% of their value. These relatively uncorrelated returns hint that the market is perhaps overly optimistic on LULU and too bearish on UA. Please see the chart below:

 

<img height="277" src="/media/images/user_6/picture-14_large.png" width="634" />

Looking Forward

While there are many other factors and metrics that one could analyze, the increase in institutional investing and subpar share price performance this past month are the main reasons for the LNKD and UA recommendations.

We are all probably hoping that our government can come together to solve the wonderfully clever metaphor that is the “fiscal cliff.” Just saying those two words makes me nervous. But I am optimistic that our government will indeed come up with a plan to address this fiscal cliff and restore the currently tenuous consumer/investor confidence.


Calinvestments owns shares of Under Armour & Lululemon. The Motley Fool owns shares of LinkedIn and Under Armour. Motley Fool newsletter services recommend LinkedIn, Lululemon Athletica, and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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