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Ronaldo Assault Accusation Is Another Reason to Avoid Nike Stock

Ronaldo is Nike soccer, and Nike stock can't withstand a hit to soccer sales

By Luke Lango, InvestorPlace Contributor


Source: Shutterstock

Over the past year, Nike (NYSE:NKE) stock has gone from dead duck to high flyer. But, in its current high-flying state, Nike stock looks quite risky. Valuation is near all-time high levels. The dividend yield is near all-time low levels. The stock has shot up to 20% above its 200-day moving average, which has historically represented a peak over the past decade.

Granted, the fundamental growth narrative supporting Nike has improved. Thus, many market observers feel the premium valuation is warranted.

But, that fundamental growth narrative appears to be weakening now, and this weakening could prove disastrous for Nike stock. Specifically, Nike athlete and global soccer star Christiano Ronaldo has been accused of rape. It is just an accusation at this point in time. Ronaldo is vehemently denying the accusation, which stems from a reported 2009 incident in Las Vegas.

Nonetheless, this accusation has potential to seriously hurt the global image of Ronaldo, and put a major dent in Nike’s soccer sales. Soccer is a $2 billion and growing business for Nike. Ronaldo is Nike soccer. Thus, if the Ronaldo assault incident blows up and Ronaldo’s public image takes a hit, Nike’s soccer sales will take a hit, too.

Normally, Nike stock could withstand a blow to soccer sales. But, at 30x forward earnings, this stock is priced for perfection. Any softness in the numbers will translate into weakness for the stock. Thus, I think the best thing to do with Nike is simply wait for a better entry.

Nike Is A No-Go Right Now

I was was very bullish on Nike stock about a year ago, thinking the stock was on the verge of a huge rebound. Now, I’m bearish, and think shares will be weak for the foreseeable future. Why the change in stance? Valuation.

A year ago, Nike stock was trading around 21x forward earnings with a dividend yield of 1.4%. The five-year average forward multiple for Nike is 25, and the five-year average dividend yield is 1.1%. Thus, you had a stock trading at a discounted valuation with a bigger-than-average yield.

Today, though, Nike stock trades at 30x forward earnings with a dividend yield of 1%. In other words, the stock is trading at a premium valuation with a lower-than-average yield.

Granted, I understand that premium valuations are warranted all the time in the market given improving fundamentals. But, I’m not so sure Nike’s fundamentals are improving anymore in a way that a warrants paying a premium.

The Ronaldo incident has the potential to be big. You don’t really need to understand the details of the accusation to understand that it has the potential to tarnish Ronaldo’s image. That is a big deal. Ronaldo is the most widely followed athlete on social media, mostly because of soccer’s global popularity and his dominance in that sport. More than that, he is the second most followed person on Instagram.

In other words, he has huge influence and a massive following. From this perspective, it is easy to see how important he is to Nike soccer. For all intents and purposes, he is Nike soccer. Thus, if Ronaldo goes down from this accusation, Nike soccer will go down, too.

Granted, Nike soccer is only a $2 billion business for Nike, so it represents less than 10% of Nike’s wholesale revenues. But, at 30x forward earnings, Nike stock needs perfection to justify the valuation. Losing some portion of $2 billion in revenue is not perfection. So, the longer this Ronaldo incident drags on, the more Nike stock is at risk to falling.

Couple the Ronaldo risk with the fact that interest rates are rising and putting pressure on richly valued stocks, that there’s a huge movement in the NBA among players to sign with Puma, and that tariffs present a pricing issue, and it is easy to see that the sum of the Nike narrative is far from perfect right now. The stock is priced for perfection. Thus, as a non-perfect narrative converges on a perfection valuation, Nike stock will struggle.

Wait For A Better Entry

Having said all that, there is no argument that Nike stock is a long-term winner. Despite near-term choppiness and a presently premium valuation, Nike is the name in the athletic apparel space that you want to own for the long haul. Just not at this price.

Time and time again, Nike has warded off competitive threats and maintained dominance in the athletic apparel world. It is highly unlikely anything about this changes over the next decade. Thus, this stock will ultimately head higher in multi-year window.

But, at 30X forward earnings, Nike stock is due for a pullback. The last time Nike stock was this richly valued was when it peaked in late 2015. The stock proceeded to drop to $50 by late 2016. That sell-off was a buying opportunity. Two years later, Nike stock is at $80.

We will get a similar situation this time. Nike stock will drop off these all-time high valuation levels as the numbers prove to be less than perfect. That drop will push Nike stock into undervalued territory, at which point the stock becomes a buy. Then, it will bounce back and rally to new all-time highs.

Bottom Line on NKE Stock

The game-plan with Nike stock is simple. Just let the dip happen, then buy the dip. It is almost impossible to tell when that dip will happen, but with a non-perfect narrative rapidly converging on a perfect valuation against the backdrop of rising rates, I think that dip will happen quite soon.

As of this writing, Luke Lango had no position in any of the aforementioned securities. 

Article printed from InvestorPlace Media, https://investorplace.com/2018/10/ronaldo-assault-accusation-is-another-reason-to-avoid-nike-stock/.

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