Shares of Nike (NYSE:NKE) have done relatively well over the past three months. They’re not up a casual 14% like Starbucks (NASDAQ:SBUX) over that time frame, but NKE stock has outpaced the broader stock market indices. Its 4% decline over the past 90 days looks pretty good compared to the 10.1% and 10.8% respective declines in the Dow Jones Industrial Average and S&P 500 index.
But investors aren’t interested in whether they can lose less money in Nike than in the Dow. Rather, they want to know if they can make money in Nike stock and whether it can continue its recent run higher.
One of the more recent concerns has been China. Apple (NASDAQ:AAPL) recently updated investors with worse-than-expected guidance, blaming part of the slowdown on sluggish sales in China. Samsung (OTCMKTS:SSNLF) disappointed investors as well. While it’s certainly something to take note of, I wouldn’t use smartphone sales to put a warning sign on every company’s back that has sales in China.
As pundit Felix Salmon wrote earlier this week: “Apple is not China”. And to point a finer point on that, consider comments from Nike’s CFO Andrew Campion, who told participants on the recent earnings call: “We have not seen any impact on our business from some of the U.S.-China dynamics that we’re all reading about.”
To be sure, China’s economy is stumbling a bit at the moment, and it’s a question of how long it will take to regain its balance. For Nike though, it’s going pretty well. When the company reported earnings in December, sales in China were up 31% year-over-year over the past three months and 25% over the past six months. Earnings before interest and taxes were up 48% and 38% over the same periods, respectively.
All said, it was a pretty good quarter as Nike beat on earnings and revenue expectations.
Valuing Nike Stock
The company’s strong earnings gave investors more confidence in the name. However, should China trade negotiations sour or if the country’s economy slows further, investors will likely sell Nike stock first and ask questions later. Whether that’s right or wrong ultimately depends on the investor.
Short-term traders won’t likely care that only 15% of Nike’s revenue comes from China. However, long-term investors will very much consider it a buying opportunity if the stock is hammered on the rationale that Nike is done for in the long term if sales in China slip.
As it stands, we have a very consistent company with Nike. Analysts expect earnings to grow 7.7% this year (fiscal 2019) and next year. However, on the earnings front, estimates call for 10.5% growth this year and 18.9% growth next year. Not only does that suggest margins are expanding, but it means the growth rate of that expansion should increase over the next four to six quarters.
That’s highly encouraging to investors, even as Nike stock trades at about 28 times this year’s earnings estimates. With solid inventory management, improving margins, predictable growth and a burgoening direct-to-consumer business, Nike stock looks to be in good hands. But what does the stock chart say?
Trading NKE Stock Price
Click to Enlarge
We’ve seen a quick 15% rally off the Christmas Eve lows. While that’s a big move, it’s not all that overenthusiastic. Consider that the Russell 2000 ETF (NYSEARCA:IWM) is up about 13% in the same period, while names like Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) are up almost 30% and 40%, respectively.
So NKE stock price rallying 15% isn’t absurd. Still, a pullback and/or some consolidation wouldn’t be unhealthy. When a stock goes too far, too fast, it just makes the pullback all the more painful. In other words, let’s get it out of the way.
We saw Nike stock pullback hard into earnings on Dec. 20, then rally after the print. It then gave back its gains in the ensuing sessions. When it stalled out, it did so at the 50-day and 200-day moving averages. This is highlighted on the chart with a purple arrow.
Just recently though, NKE stock pushed through the 200-day.
As a result, I would love to see Nike stock pullback and find support near the 200-day, between $74 and $75. If so, I think it can give NKE the energy it will need to push through $78, a level that’s been resistance over the last three months. If it can get through, NKE stock will have the opportunity to make new all-time highs.
Let’s watch this one going forward, particularly if the overall markets cooperate.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long SBUX, AAPL and AMZN.
