Few companies have been as controversial as Nike, Inc. (NYSE:NKE) during the past month. Regardless of your stance on Nike’s latest spokesperson, Colin Kaepernick, his presence has and will continue to affect NKE stock. So, too, will the U.S./China trade war — since China is where most Nike shoes and apparel are made. It’s a potentially dicey situation for NKE stock traders.
What’s more, Nike will slip into the earnings confessional after the close on Tuesday. The company is expected to post a profit of 62 cents per share on revenue of $9.93 billion. These figures represent gains of 8.77% and 9.5%, respectively, for Nike.
EarningsWhispers.com puts expectations a touch higher, however — at 66 cents per share. Given the strength of the U.S. consumer right now, this higher target might not be far from the mark.
Still, guidance will be the key to a post-earnings rally for Nike. On one hand, we have the Kaepernick situation. There is clearly a sizable portion of Nike’s customers that are offended that Kaep is the new face of Nike.
However, Generation Z and Millennials are a major force in the market right now. According to a recent study, Nike is the top brand for both by a mile. The company has engendered a sense of trust and authenticity with both Gen Z and Millennials that is unmatched in the market. If these groups put their money where their mouths are, Nike should be able to offer up solid guidance.
That said, this guidance is sure to be undermined by the U.S./China trade war. Billions in tariffs cannot be ignored at this point, especially with Nike’s production centered in China. The question is, can rising sentiment among Millennials and Gen Z outweigh the impact of Chinese tariffs?
Click to Enlarge Wall Street certainly has its doubts. According to data from Thomson/First Call, 18 of the 37 analysts following NKE stock rate the shares a “hold” or worse. Additionally, the 12-month price target for Nike stock stands at $84.58 — a discount to Friday’s close. While there is room for potential upgrades and price-target increases, Nike will have to overcome Chinese tariff concerns with guidance before any of these NKE bears will move.
There are also technical concerns to contend with ahead of Nike’s earnings report. NKE stock has recovered nicely from the Kaepernick dip, rebounding from support at their 50-day moving average. This trendline has supported NKE stock since April.
But, the post Kaep bounce has pushed NKE stock into near overbought territory. It’s 14-day relative-strength index is now pushing toward 70, indicating overbought conditions and increasing the chances of a post-earnings sell off for profit taking.
How big of a move are we looking at? Currently, October implied volatility is pricing in a potential 6% move for NKE stock following earnings. This places the upper bound at about $90, while the lower bound rests near $80. Support should hold firm near $80 in the event of a decline, as the stock’s 50-day trendline is in the area. Resistance should also emerge at $90, baring anything short of better-than-expected guidance.
2 Trades for NKE Stock
Put Spread: With the stock near overbought levels and the potential for middling guidance due to Chinese tariff pressures, I’m inclined to bet against NKE stock heading into earnings. Traders looking to take advantage of a sell off might consider an October $82.50/$80 bear put spread.
At last check, this spread was offered at 65 cents, or $65 per pair of contracts. Breakeven lies at $81.85, while a maximum profit of $1.85, or $185 per pair of contracts, is possible if Nike stock closes at or below $80 when October options expire.
Call Spread: For those traders expecting strong guidance despite Chinese concerns, an October $87.50/$90 bull call spread is a solid trade ahead of earnings. At last check, this spread was offered at 78 cents, or $78 per pair of contracts. Breakeven lies at $88.28, while a maximum profit of $1.72, or $172 per pair of contracts, is possible if Nike stock closes at or above $90 when October options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
