The media says it’s rare for any analyst to downgrade Nike Inc (NYSE:NKE) and they’re absolutely right. Since 1997, NKE stock carried the good fortune of only having one “sell” rating at any one time. That status, however, came to a sudden halt when Bank of America Merrill Lynch decided to play spoiler.
More than a few eyebrows were raised, particularly because you just don’t downgrade blue chips like Nike stock.
So just where is the respect? NKE stock has been one of the most consistent performers in the current decade. Between 2010 through last year, there was only one instance — in 2012 — where shares failed to deliver double-digit growth. Even including the uncharacteristically weak year we’ve had, Nike stock still averages 21% annual returns for the decade.
Regardless of your investment strategy, those are numbers you can’t ignore.
NKE Stock Can’t Ignore the Competition
Some would argue that it’s NKE that hasn’t shown respect to its competitors. That’s also a valid statement.
Long-time rival Adidas AG (ADR) (OTCMKTS:ADDYY) bared its teeth and really means business. Never mind the fact that Nike stock has top billing in the New York Stock Exchange, and Adidas makes due with the pink sheets. ADDYY is up 57% year-to-date, whereas Nike stock is sucking its wind, down 21%.
We also can’t leave out the new kid on the block — Under Armour, Inc. (NYSE:UA). Undoubtedly, UA has had a rough go at it this year, even rougher than Nike stock. But their marketing efforts are phenomenal, and they’re making serious inroads into professional sports sponsorships.
Yes, it’s sorta like trading blows with the neighborhood bully, but nobody wants to get punched in the face. So Under Armour is still technically a danger to NKE stock even while the upstart competitor is endangering itself.
The product development team also has to take some responsibility for this year’s bum note. NKE is supposed to be the trendsetter, not the follower. Yet advanced orders from the North American retail market have been declining for the fourth consecutive quarter. That has also allowed companies who are not traditionally considered NKE rivals, like Lululemon Athletica Inc. (NASDAQ:LULU), to nibble away at market share.
It’s No Time to Hang Up Nike Stock
To summarize, Nike stock is having a year to forget. But does that mean you should give up on the apparel company, or — gasp! — short NKE stock? Let me cover my bases by saying, no, no and heck no!
First off, we have to acknowledge that not everything about the company is a train wreck. I realize that analysts are circling NKE like a school of hungry piranhas because of declining forward demand. But that has to be taken within the context of rising sales via Nike.com. Through their direct-to-customer channels, they can skip the retail middleman and get a much higher margin. That’s a big plus for Nike stock, no matter how you look at it.
In addition, NKE has a wealth of personal customization options through their online channel. This provides a sort of double revenue stream, in that there is a sale of a product and of a service simultaneously. Such customization features are a big hit for trendy Millennials, and only serve to improve already superior profitability.
You Can’t Argue With Nike’s Results
But the best bullish argument in my opinion is the robust history of NKE stock.
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We also have to consider the consistency in these wins. Since the end of 1984, there has never been a time in corporate history where Nike stock slid backwards two times in a row. Even when the world seemed to be collapsing in the wake of the 2008 financial crisis, NKE took one loss of 18%, and that was it. By 2010, the average share price was 29% higher than in 2008, and continued to grow at a clip rate until now.
The counterargument is that past performance is not indicative of future results. However, NKE stock is again a premiere blue chip. I am more inclined to put weight in their nearly four decades of business experience than I am into the implications of one bad outing. Based on all the factors available, it’s reasonable to conclude that the present bearishness is a shrewd, long-term opportunity.
It may not be the most popular opinion right now. Nevertheless, I just see Nike stock taking it in the chin over the next few months until a reversal occurs. This is NKE that we’re talking about — not some second-hand thrift shop down the street.
And as history shows, betting against them is usually a recipe for disaster.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
