Equity markets have been in turmoil for months. The mighty bulls have stumbled since October and they have not been able to find footing. For a while, experts in the media have called for retesting the February lows. They got their wish, but that opened a trap door below it so now there is rampant fear. As a result, this is the worst December on record and perhaps the first red year since the rally started off the 2008 debacle. Despite the carnage, there still are some stocks in the green and Nike (NYSE:NKE) stock is one of them. Year-to-date, NKE stock is still up 7%. Compare that to the S&P 500 down 12% for the same period.
Even more impressive is that Nike stock did this while the retail sector has been especially devastated in this correction.
NKE reported earnings last week and it delivered a gem. NKE stock rallied on the headline in spite of very weak markets. Management beat expectations on all metrics and told a good story going forward. Nike grew its digital sales 40%, so it is definitely on board with the all-important e-tail trend.
I was lucky to have profited from a short-term directional upside bet on the earnings reaction. So I come into today with profits in pocket. Regardless, the macroeconomic conditions are still healthy, so this is the time to start or add to a long-term position in NKE stock.
Is NKE Stock Worth a Buy?
This is not the same as calling the bottom in the stock. In fact, the S&P charts suggest a bounce off these oversold conditions but another dip to follow to set even lower lows in the next few weeks. So going long now means that I am ready to live through another test in January.
Fundamentally, Nike stock is a proven winner. The company rarely commits faux pas that spook Wall Street. It was tested recently with the NFL “kneel-gate”, when the company signed Colin Kaepernick as a spokesperson, but it survived the public opinion unscathed.
NKE dominates on the global stage and this is likely to persist for decades. It continues to fend off challengers like Adidas (OTCMKTS:ADDYY) and Under Armour (NYSE:UAA). This is the Goliath that won’t be easy to beat.
Currently, the retail sector is under sever pressure mainly from what Amazon started a decade ago. But Nike has its own line of products, so it controls its own destiny. This is not like a brick-and-mortar department store that sells third-party products for low margins.
NKE’s advantage is much like Netflix (NASDAQ:NFLX) has in streaming. Consumers want its products, so demand remains strong. Another example of Nike’s advantage is LuluLemon (NASDAQ:LULU); it too markets its own brands and its stock is up 42%.
NKE stock sells at a price-to-earning ratio of 26, which is not cheap. But it is not bloated either, so investors will allow for a little froth if they see performance. The Nike earnings report is proof that they are. This gives management more leeway for a P/E premium.
Wall Street experts are split between “Buy” and “Hold”, but they all see more upside in the Nike stock price. And NKE is trading 25% below their average price target range.
Technically, Nike stock has fallen into 12-month support. The $65-per-share zone has been pivotal before, so it will provide support on the way down. This is a good base for bulls to defend the stock, though it will need help from the general markets.
This also has been a contention level dating back to November 2015, so it is even more significant for the long term. I am confident that in the long run, if stocks in general are higher, NKE stock will also be higher.
Since these are still treacherous markets, it is best to not enter a full position all at once; entering in tranches allows room to adjust for short-term pitfalls.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.