Finding a Cure for 'High-Multiple-Itis'

 | Apr 29, 2014 | 2:20 PM EDT
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Sitting with CEO Kevin Plank at the new Under Armour (UA) store in Soho this morning surrounded by fashion, I recognized just how fickle the Wall Street fashion show really is. Under Armour has been victim of a disease that has variably been called "High-Multiple-itis," "momentum denouement," and "Amazon road kill."

Understandable given that only a handful of companies in the S&P 500, notably Amazon (AMZN) and (CRM) have had consistently higher sales growth than the company.

Remember, though, that ever since the end of February when blew away the numbers and then rallied and pirouetted, the kiss of death for the algorithms (yes there's an algo for that), it's been history for all of the high-multiple earnings stocks and the high enterprise-to-sales stocks. And at 50x earnings, Under Armour is ground-zero for the contest.

UA has really been heavy, especially when you consider that the darned stock was just added to the S&P 500. That was a short-lived spike after a quarter that seemed a tad Amazon-like -- meaning that it had big spend that might not be immediately requited with earnings.

For me, this has gotten all hit or miss. I am adamant that the high-multiple-itis can only be cured by growing into the multiple, something that Under Armour has been through before. It's a wild ride that twists and turns -- meaning turns down-- before it goes higher.

But higher-multiple-itis is different from "no-multiple-itis," meaning a company that has no intention of being profitable because it wants to be the next Amazon. That's because I think the latter cohort has to be sold on every bounce. Even today's bounce. But the former can be ridden as long as you accept that the downturn's cure can be considered worse than the disease by a lot of the fast-money crowd.

The history of this period following the pirouette is simple: Four days of downdraft followed by two days of upward movement that ultimately fails. The first day -- today -- that they bounce brings out the "REIT" buys the next day, meaning the analysts come out of their foxholes and try to get the stocks higher.

But the next day has been a total must-sell day, even for Under Armour, and forget about the enterprise-to-revenue guys. Remember, the selloff is not the fault of the CEO. People decided to pay too much for Under Armour's growth and while Under Armour beat earnings and sales, it did not raise the forecast. In the world we are in now, you need clean beats, top and bottom, and clean raises, top and bottom. If not, you are instantly waste-binned. Also in this new era, it does not matter whether you are being conservative in your forecast. They are all taken as gospel.

If you have any doubt about what the market likes, consider Apple (AAPL), which beat on the top and bottom line and then allowed you to raise estimates based on the pipe alone. Under Armour did not let you do that. It's spending didn't let you.

So, right now, spend is out. Acquisitions are out. Firing and returning capital is in. I think that today's a respite.

Don't be greedy.

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