Why Under Armour Is The Most Shorted Stock In The S&P 500

Under Armour Curry Two Red, White
Under Armour Curry Two "Red, White & Blue."
Courtesy of Under Armour.

Under Armour has been on the receiving end of a host of honors and accolades in recent months, but a new title — most shorted stock in the S&P 500 — doesn’t exactly bode well for the rising footwear-and-apparel company.

More than 33 percent of the brand’s shares outstanding are sold short, according to the latest data. (Short sellers trade borrowed stock under the belief that the stock’s price will drop and they can buy it back and pocket the difference as profit).

Under Armour’s share price has been shedding dollars for several months now, hitting a 52-week low of $31.62 in January. And the heightened short interest suggests that there is a belief that the stock will tumble further.

While this isn’t good news for the fast-growing athletic brand, Citi Research analyst Kate McShane says, “There’s more than meets the eye.”

Although part of Under Armour’s elevated short interest could be due to investors taking a more negative view on discretionary stocks in general (with higher multiple names possibly presenting easier targets), we believe that there could be artificial pressure, unrelated to Under Armour fundamentals, contributing to the elevated short interest,” McShane wrote Wednesday.

McShane argues that the approval of a new Class C nonvoting common stock, by Under Armour’s board in March, may be a better explanation for a surge in short interest.

Nonvoting class shares, trading under the ticker UA/C, were distributed via a stock dividend to existing investors and began trading in early April. (Under Armour’s decision to introduce the stock had been dubbed a move to help founder, chairman and CEO Kevin Plank preserve majority voting power.)

Since then, the short interest in Under Armour stock significantly spiked, according to McShane.

For the first two months, UA/C traded at an average discount of 7 percent to UA Class A shares, but more recently the spread has risen to over 10 percent,” McShane wrote. “Since the Class C dividend, UA’s short interest (as a percent of float) has increased significantly, rising to 27.8 percent in mid-June (greater than 30 percent when including UA/C), from 14.6 percent at the end of March.”

McShane believes that “a portion” of Under Armour’s elevated short interest has been driven by traders’ view that the spread between UA stock and UA/C will compress, “thus shorting UA while going long UA/C.”

While it is difficult to quantify the appropriate discount that UA/C should trade to UA, the current spread appears elevated compared to other dual voting class stocks,” the analyst wrote. “Ultimately, we believe that spread compression and unwind of shorts could be supportive for UA.”

As of 11:15 a.m. ET, UA/C had gained 25 cents, to $36.47, and UA advanced 52 cents, to $40.37.

Under Armour will report Q2 earnings on July 26.