The market volatility of late 2018 has made investors more selective as to which stocks to add to their portfolios. If you believe in holding shares for the long term, I’d suggest that you take a closer look at Nike (NYSE:NKE), because in the long term you could do a lot worse than Nike stock.
Nike makes the majority of its revenue from selling footwear, with apparel being the second biggest revenue driver. This is followed by sporting equipment and accessories such as bags, hats, gloves, and balls.
Here is why I think Nike stock could continue to offer a healthy mix of dividend and capital growth in the near future.
Robust Fundamentals and Nike Stock
Nike reported its Q3 results on Mar, 21. Nike’s net income was $1.1 billion and the diluted EPS came at 68 cents. Nike’s earnings call highlighted the strong revenue growth, gross margin expansion, and lower effective tax rate as well as the two important growth catalysts, i.e. the emerging markets and and sales over the the ecommerce platform, Nike.com.
Although North America and Western Europe are still its top regions for sales, Nike has a growing foothold in emerging markets, with Greater China representing its third largest market. Globally, about 66% of revenue came from footwear, 30% from apparel, and about 4% from equipment and accessories. Going forward, management sees tremendous growth opportunity in the apparel segment as well as women’s business.
Q3 results showed that North American sales increased 7%, which was seen as a disappointing number when compared to the expected 10%. On the other hand, the group’s sales were up 12% in Europe, the Middle East and Africa, and 14% in Asia Pacific and Latin America, with impressive Chinese growth of 24%.
Nike Stock in the Long Term
Investors also noted that Nike’s digital sales increased 36% during the quarter, as its investments in mobile apps, especially the popular SNKRS app, continue to bring in the customers. In other words, the sportswear giant is using a strong balance sheet and impressive cash flow to invest in its brands and digital technology, especially in emerging markets.
Long term investors should also consider the strength of the group’s brand portfolio. Strong brands give a company increased ability enter new markets and to raise prices, boosting revenue growth. In addition to the core brand, its other brands include Converse, Jordan, named after basketball player Michael Jordan, and Hurley, which designs, markets and distributes surf and youth lifestyle footwear and apparel.
Nike has the 18th most valuable brand in the world, worth over $32 billion. Q3 results showed that the revenues for the NIKE brand alone were $9.1 billion, up 12%, with double-digit growth experienced in both footwear and apparel.
At almost 33 times earnings trailing earnings, the $133 billion-cap company may not appeal to all committed value investors. Nevertheless, I wouldn’t dismiss the stock simply because it trades on a high multiple. Considering the company’s growth over in recent years, I believe it may be worth paying a premium to invest in this business.
Investors may also want to note Nike’s gross margin, which has increased over 1% to 45.1%, when compared to the year-ago quarter. Sometimes, it’s worth paying up to acquire the best stocks for your portfolio.
Nike’s dividend yield stands at 1.1 %. That may not seem great in comparison to some of the high-yielding stocks that can be found elsewhere in the market, but I’d argue that its long history of successive dividend would be important for those looking to secure financial independence through their investments.
Over the long term, quality stocks tend to do quite well and reward the shareholders. And as a clear leader in the global market for athletic footwear and apparel Nike is likely to continue producing profits well into the foreseeable future.
Short-term Technical Analysis
Year-to-date, Nike shares are up more than 13%. The stock even breezed through the broader market sell off in 2018 as its price increased 28% over the year.
As a result, short-term technical indicators have become somewhat over-extended. Investors who pay attention to short-term oscillators should note that NKE’s technical message has also become “overbought.” Therefore it was not surprising to see an initial decline of about 5% following the double-beat third-quarter earnings report.
In April and May, Nike stock may trade sideways for several weeks, and even have a pullback toward the mid-$70’s level, where the stock is likely to find major support.
I would not advocate bottom-picking in case of near-term price weakness. Yet, I find Nike stock to be a compelling buy candidate and I’d regard any potential dip in the price as an opportunity to grab the shares for the long term. Within a year, I ‘d expect the shares to trade over $100.
Therefore, if you already own NKE stock you might want to hold your position. That said, if you are worried about short-term profit taking, then within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3-5% below the current price point, to protect your profits to date.
If you are an experienced investor in the options market, you may also consider protecting your portfolio with a covered call.
The Bottom Line on Nike Stock
Its global foothold, easily recognizable brands, growth potential and the prospect of increased dividends makes NKE stock relatively appealing for a diversified portfolio.
I believe that management’s interests should continue to align with those of the shareholders and that investors buying today will be well rewarded over the medium term.
However, there might be some profit-taking in Nike shares in the short term. Investors always need to have a handle on any prospective company’s financial position as a jumping off point. Therefore, if you are planning of investing in Nike stock for the first time, you may want to wait for the next earnings report before you hit the “buy” button.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
