When it comes to Nike (NYSE:NKE) stock, I’ve worn many hats.
In late 2017 with Nike stock trading around $50, I wore the bull hat, writing that “the window to buy this athletic retail giant at an attractive discount is closing.” Then, in mid 2018 with Nike trading at $80 and coming off a 60%-plus rally over the past year, I wore the bear hat, writing that “the dip in NKE stock is coming, and investors should be ready to buy it.”
That dip has finally arrived. Now, I’m putting my bull hat back on.
At current levels, NKE looks attractive. The formerly overstretched valuation has compressed, and while it still remains stretched relative to historical standards, it is in-line with still improving growth fundamentals.
Meanwhile, the company appears to be largely exempt from tariff pain, and long-term demand stability should command a premium in this turbulent market. Lastly, Nike has dropped back to its 200-day moving average, and that technical line of defense should provide support and stabilize the stock.
Overall, all signs point to this dip in Nike stock being an opportunity.
The Fundamentals Remain Strong
The fundamentals supporting Nike have been strong over the past several quarters and remain strong today.
At its core, Nike is the leading brand in a red-hot apparel category that simply isn’t losing any momentum. Athletic has been the apparel trend for several years now. This trend isn’t showing any sings of slowing, as healthy and active lifestyle trends continue to grow in popularity and consumers continue to adopt athleisure styles en masse.
Nike is the king of this space. This has been true for a long time. It remains true today. Every once in a while, a competitor emerges and temporarily steals share from Nike. But, time and time again, Nike bounces back and reclaims dominance in the athletic apparel game.
At this point in time, it looks like Nike is in the process of reclaiming dominance. In the mid-2010’s, Adidas (OTCMKTS:ADDYY) leveraged a return to retro styles to take share away from Nike. Nike eventually fought back with accelerated product innovation, a direct retail strategy, and streamlined geographic investments. The net result was Nike regaining athletic apparel dominance.
Today, Nike is still reaping the rewards of those initiatives. Among trend-oriented teenagers, Nike remains the number one clothing brand, the number one footwear brand, and the number two shopping website, according to Piper Jaffray.
Google Shopping trends for Nike remain favorable and stable both domestically and globally.
The controversial Colin Kaepernick ad drove record engagement and likely will build long-term brand loyalty. Recent technology acquisitions and a direct retail focus should power continued innovation in the retail experience. And, as Oppenheimer points out, the company is “well insulated” to the threat of tariffs due to production diversity and pricing power.
Overall, the fundamentals supporting Nike stock are still very favorable. As such, if valuation and technicals check out, this recent correction is a dip worth buying.
Valuation and Technicals Now Look Good
I wore a bear hat in mid 2018 not because the fundamentals supporting Nike stock were deteriorating, but because the valuation and technicals look overstretched. The stock was trading way above historically normal and sustainable valuation levels, while it had simultaneously diverged from the 200 day moving average in a way that was also historically unsustainable.
Both of those anomalies have corrected themselves during this recent sell-off.
NKE still trades at a premium to historical valuation levels. Normally, this stock trades at 25X forward earnings. Today, it trades at 28X forward earnings. But that is only a slight premium, and that slight premium is justified by bigger earnings growth potential through a margin rebound over the next several years.
Meanwhile, this recent sell-off has also dropped Nike stock back to its 200-day moving average.
Overall, it looks like Nike has sufficiently cooled off to start buying the dip here. I don’t think this stock will post record returns from here. But, it should work as the valuation has converged to a point which agrees with the underlying fundamentals.
Bottom Line on NKE Stock
Nike stock is a long-term winner that got over-extended in the near-term. The stock has now corrected downwards to more reasonable valuation levels without much changing about the fundamentals, and that means this dip is an opportunity.
As of this writing, Luke Lango was long NKE.
