The swoosh keeps attracting more bulls.
Piper Jaffray recently reiterated its “Overweight” rating on athletic retail giant Nike (NYSE:NKE), saying that accelerating momentum in the Jordan brand is allowing the king of athletic apparel to regain market share.
But, we all already know this. The writing has been on the wall for some time. After a stretch from 2015 to 2017 wherein Adidas (OTCMKTS:ADDYY) stole a bunch of market share from Nike, the trend reversed course in late 2017.
Ever since, Nike has punched back. It has pushed product innovation at a robust rate, emphasized higher-quality direct selling channels, streamlined investments into cultural epicenters, and continued to grow its already unprecedented athlete portfolio.
The result? Nike has regained lost market share, reinvigorated growth in its North America business, and turned the corner on profitability declines.
Oh, and NKE stock has rallied 55% over the past year. And, it’s more than 20% above its 200-day moving average, which is about as far above the 200-day as this stock has traded over the past decade.
In other words, NKE stock is already priced for this huge turnaround. While that doesn’t mean NKE stock will drop from here, it does mean that upside going forward is limited in the near-to-medium term.
Thus, as opposed to rushing to buy now while this stock is trading at extended levels, I think the game plan when it comes to NKE stock is simple: just wait for the dip.
Nike Is Punching Back
There’s no doubt about it. After getting its butt kicked by Adidas for roughly two years, Nike started punching back in late 2017.
It was the punch heard around the world.
Specifically, Nike pushed what management is calling its Consumer Direct Offense initiative. That initiative essentially comprises three parts:
- Focus on direct selling channels, thereby maintaining a high-quality selling experience and expediting product time to market.
- Streamline investments into cultural epicenters, thereby putting Nike at the forefront of emerging fashion trends.
- Increase product innovation, thereby ensuring a continually new and exciting product mix.
The Consumer Direct Offense initiative has powered a new era for Nike which is very different from the 2015-17 period where Nike was stuck in neutral. Now, the company is building out cool new stores, dramatically increasing brand awareness, and pioneering sneaker innovation.
The sum of these changes has catalyzed a huge turnaround in Nike’s financials. Namely, North America sales growth is back, and margins are finally rebounding.
Going forward, this trend should persist. Search interest trends indicate that Nike is starting to once again widen its leadership position against Adidas. Moreover, on its latest conference call with analysts, Foot Locker (NYSE:FL) highlighted Nike 18 times and Jordan 14 times. Adidas was highlighted just eight times. Under Armour (NYSE:UAA) was never highlighted.
And, from a ground-level observation standpoint, I’m starting to see Nike once again dominate the athletic apparel scene.
Overall, it looks like Nike is just starting its operational upswing. That means that in a multi-quarter to multiyear window, NKE stock will be a winner.
Just Wait for the Dip on Nike Stock
Despite the company’s operational improvements, the best thing to do with NKE stock is to wait to buy on the dip.
This stock has come very far, very fast. The trailing 12-month rally of 55% has pushed NKE stock 20% above its 200-day moving average.
Over the past decade, a 20% premium to the 200-day has been NKE stock’s “maxed out” level. NKE stock has traded 20% above its 200-day eight times over the past decade. Each time, the stock was at a near-term peak and pulled back meaningfully over the subsequent few weeks.
Plus, NKE stock is trading at 30X forward earnings. That is way above its historically normal valuation (24.5X) and also at 2015 levels, which were unsustainable.
Overall, then, there is no reason to buy NKE stock here and now. The stock looks maxed out, and the valuation is as expensive as ever.
Eventually, this stock will pull back. History says a pullback could happen quite soon considering the stock is 20% above its 200-day. That pullback will be a buying opportunity. But, until then, there is no reason to rush in and buy NKE stock at all-time highs, with an all-time high valuation and trading at an all-time high premium to its moving average.
Bottom Line on NKE Stock
There is no doubt that NKE stock is a long-term winner. Regardless of what threat the athletic retail industry throws at it, Nike always punches back and manages to remain the dominant force in the space. As such, this stock will be a winner in the long run.
But, in the near to medium terms, I think investors can afford to wait for the dip.
As of this writing, Luke Lango was long FL.
