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Cramer: How to stop Under Armour's vicious decline

If there is one thing that is clear to Jim Cramer these days, it is that the love for momentum stocks is quickly fading — especially Under Armour.

On Monday, the stock received the ultimate indignity when Morgan Stanley downgraded the stock to underweight, the absolute worst thing that could happen to a stock.

Morgan Stanley's indictment cited a threat of declining share and average selling prices to its valuation. The analyst worried about near-term earnings uncertainty as Under Armour is losing apparel market share for the first time in three years and prices are being cut.

Footwear is also down 20 percent since January 2013. Morgan Stanley implied that Under Armour now must compete on price.

"My take? You can't beat Nike at their own game," the "Mad Money" host said.





Stephen Curry Under Armour basketball shoe is displayed in San Rafael, California.
Getty Images
Stephen Curry Under Armour basketball shoe is displayed in San Rafael, California.

Morgan Stanley also added that five-year sales and earnings growth estimates are too high by 1 and 3 percent, respectively, and North American Sales may slow to 16 percent.

It was because of these reasons that the brokerage slacked its price target on Under Armour to $62 from $103. Wowzer!

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These worries accounted for the almost 7 percent drop in the stock on Monday. In Cramer's opinion, the real problem with Under Armour's stock is the valuation.

Even after the severe decline, it still sells at roughly 55 times 2016 earnings estimates and 43 times next year's numbers. In comparison, the average stock trades at just 17 times earnings.

The problem is not just with Under Armour, though. It's all momentum stocks. This group refers to high-flying stocks of companies that have a history of analysts aggressively raising numbers after they report. The stocks are priced for perfection.

"Once the spell is broken, once people start to believe that the growth rate is decelerating, momentum buyers flee because they have no idea how to value a stock with declining growth rate. You can be a momentum stock if you are losing momentum, and that is Under Armour," Cramer said.

So, what could stop the brutal decline?

Cramer thinks that if Under Armour can crush estimates when it reports later this month, that will break the downward trajectory. If not, then the stock will not bottom until it is genuinely cheap, many points from its current price.

"Those who own it are walking this land of broken momentum stocks where, sadly, happiness is just an illusion filled with sadness and confusion, until the company can prove this bearish analyst wrong," Cramer said.

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