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Affluent Christian Investor | October 22, 2017

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Under Armoured: Why We Shorted A Company That Didn’t Protect Its Investors

Opening of Under Armour store

Opening of Under Armour store

A few weeks ago, Under Armour stock crashed in value by 26%. This occurred when they announced that their holiday sales were less than expected (and holiday sales are very important for retail companies) and that next quarter’s earnings were likely to be lower than previously expected.

On the heels of that news, it the CFO of the company announced his departure for personal reasons.
Recently, the company was rocked again by controversy because the CEO appeared on television and invited skeptics to ‘look in my eyes…do you believe…this is a team that knows how to win!’ (video available here). In that same interview, he appeared to endorse President Trump saying that having ‘a pro-business president… is a real asset for the country’. Given our hyper-politicized age, you will probably not be surprised to know that the latter statement has ignited a social media boycott firestorm.

Before the stock price collapsed last week, we were already, to put it mildly, not fans of the company. Our index, Vident Core US Stock Index (VCUSX) had UAA at a zero weighting. Our WeatherStorm Forensic Accounting Long Short Index (FLAGLSX) had a short position in the company. Why? It’s not because we looking into Kevin Plank’s eyes – it’s because we looked into his company’s financial statements. The eyes might be the windows of a person’s soul, but the Balance Sheet, P&L and (especially) cash flow statement are the windows into a company’s soul.

Here’s what we look for in a company: A board of directors which works for the shareholder and a CEO who works for the board of directors. Companies like that split the role of CEO and Chairman so the CEO is not his own boss. Companies like that have board members without related party transactions, i.e. they avoid having board members who are in some way dependent on the management team which they oversee. Companies like that do not engage in the types of accounting practices which are fertile ground for financial shenanigans. I’m not talking only or especially about the illegal stuff, I’m talking about the perfectly legal but still misleading techniques that top executives use to ‘manage’ earnings reporting. This practice is called ‘aggressive accounting’, and it’s a red flag.

This is not to say that UAA or any other company with such accounting red flags are definitely issuing misleading reports. That’s almost impossible to know until after the damage is done. When earnings reports eventually catch up with the company, certain characteristics indicate that management has greater opportunities for such practices and certain ratios help identify which companies are at greater risk for shareholders. The science of identifying such practices is called ‘forensic accounting’ and that science is what caused us to be skeptical about Under Armour.

The sort of things that stand out as red flags appear mainly in the zone of differences between revenues and profit which are based on cold hard cash flows as opposed to those coming from the world of GAAP earnings. Companies have a great deal of discretion in terms of the treatment of costs and revenues as they move from cash accounting to book accounting. Many acquisitions (or long term affiliation deals with outside entities such as UAA’s numerous pro-sports partnerships), accruals, etc. are red flags because they are zones of high managerial accounting discretion. Companies that have unusually differing cash flow and book earnings are red flags. Companies with earnings dynamics and pricing that indicate a higher probability of a value based on hype are a red flag.

UAA had a lot of red flags. Apart from the newer, much lower price, it still has those red flags. The firm is also at a relatively high risk for being subject to a class action suit. In addition, its revenue forecasting issues have led to the departure of the CFO ‘for personal reasons’, and a CFO departure during an accounting scandal is not a risk diminishing factor, even if you believe that they just suddenly wanted to spend more time with their families.

Mr. Plank’s comments have added his voice to the welcome debate about whether President Trump is a pro-business president or not. My purpose here is not to answer that question. My purpose here is to say that one of the most pro-business assets which a country can have is CEOs who know deep down that they are just the hired help of the shareholders (or skeptical stewards who decide not to be shareholders), who don’t depend on charm, momentum or high profile announcements of business alliances which are not matched by high performance.


Originally published on the Vident blog.

Jerry Bowyer is a Forbes contributor, contributing editor of, and Senior Fellow in Business Economics at The Center for Cultural Leadership.

Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.

Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.

Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.

Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.

Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.

Jerry lives in Pennsylvania with his wife, Susan, and the youngest five of their seven children.


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