If you follow the athletic apparel sector, you are familiar with a few major story-lines, none of which feature NKE stock in a positive light.
One, wholesale athletic retail is in disarray because brands are really pushing forward with direct selling channels. See the struggles of Dicks Sporting Goods Inc (NYSE:DKS) and Foot Locker, Inc. (NYSE:FL) recently.
Two, Under Armour Inc (NSYE:UAA) is also in disarray. Golden State Warriors superstar and Under Armour front-man Stephen Curry has somewhat slipped from the limelight. And remember that golf player Jordan Spieth? Yeah, well, neither do I.
And three, Adidas AG (ADR) (OTCMKTS:ADDYY) is hot. Like red hot. And that’s killing king athletic retail player Nike Inc (NYSE:NKE).
So how do investors turn these story-lines into actionable investment ideas?
Well, you could buy beaten up brick-and-mortar athletic retailers that you actually see being around in 5-10 years because of their brand name and premium/exclusive offerings. FL stock fits that bill. You could also stay short on an already hugely beaten up UAA stock.
You could do either of those. But the best thing to do? Buy NKE stock.
Here’s why.
Nike Is Making A Comeback
See the chart below. Its no secret that Adidas has been eating Nike’s lunch for some time. As soon as Adidas started gaining search interest share on Nike, NKE stock plateaued. This dynamic has been in play for the better part of the past 2 years.
But this dynamic appears to be ending.
Look at the orange line in the chart above. It represents the search interest delta between Nike and Adidas. That has shrunk considerably since mid-2015 and has been on a consistent downtrend.
But doesn’t it look like that orange line is finally turning around? Well, that’s because it actually is turning around.
Turn your attention to the chart below. The 20-week moving average of the search interest delta between Nike and Adidas (green line) has a consistently positive slope for first time since late 2014 / early 2015. Meanwhile, the 52-week moving average (blue line) is rapidly approaching flat slope territory for the first time since late 2014 / early 2015.
So what does all that actually mean? After being kicked in the butt for 2 years, the Nike machine has woken up and is fighting back.
Nike has injected a whole of bunch of innovation and freshness into its products. For example, Air Max cushioning has been a huge hit this year. Half of the company’s top 10 sportswear styles right now feature this new technology.
Meanwhile, Nike has launched this whole Consumer Direct Offense initiative, which essentially streamlines the company’s investment and selling channels. The company is pushing selling direct versus wholesale while focusing investment on key global metro areas (which, perhaps not so coincidentally, is the exact same thing Adidas did a few years ago).
All these recent changes is why CNBC’s Jim Cramer doesn’t think Nike is a sneaker company anymore. They have “turned on the scientific jets,” according to Cramer. That makes them a “technology company in the shoe business.”
And its what is causing an inflection point in what has been a downtrodden Nike growth narrative over the past 2 years. For the first time in 2 years, the search interest delta between Nike and Adidas is starting to show signs of widening. That means Nike is doing all the right things to return to its high growth, pre-2016 ways.
But NKE stock still has a long way to go to get back to pre-2016 levels. That is the opportunity.
Bottom Line on NKE Stock
NKE stock has traded around a 26.3-times price-to-earnings multiple over the past 5 years. Today, NKE stock trades at just 21-times trailing earnings.
That is about as cheaply valued as NKE stock has been since late 2012.
NKE was a $25 stock then. By late 2015, it was a $65 stock. A 160%-plus return in 3 years isn’t so bad.
Can NKE stock make a similar rally here?
Maybe. But first, Nike needs to prove it can fight back against Adidas. Nike is starting to do that, and once those signs show up in Nike’s numbers, this stock will take off.
So whats the best thing you can do in athletic retail right now? Buy NKE stock.
As of this writing, Luke Lango was long NKE.
