There is not a person on this planet who doesn’t know Nike (NYSE:NKE). It’s a household name on every continent. Last night the company reported earnings and Nike stock is active on the news. So is it too late to get in?
No. Nike stock is a long-term winner and belongs in every serious investment portfolio. This is a proven management team that hasn’t taken a misstep in decades. They have had their fair share of controversies but they always manage to use them to their advantage. So the bear thesis for NKE is thin and most likely a losing proposition.
Buy and hold this one.
I would have loved to see a big dip so I can catch the falling knife as others erroneously panic out of their positions, but it looks like Wall Street came to its senses quickly.
The earnings report wasn’t all gold stars, but it didn’t leave many reasons to sell it, even though they tried. Last night, the initial reaction to the headline was a sharp 4.5% dip, but it quickly turned around.
Management missed on earnings which is atypical for them, especially given that expectations weren’t too high. But met or beat pretty much everything else. There was a lot of trepidation coming into the earnings, which explains the after hour u-turn action in NKE stock.
The U.S. performance was twice as strong as expected and in some sense China was strong too. NKE managed to grow their pie there despite of the geopolitical headwinds. They delivered decent margins in spite of the operational and sourcing threats that stem from the tariffs.
In short, the earnings report had nothing alarming, so the ongoing long-term bullish thesis on NKE doesn’t change. And anyone disappointed with last night’s report has unrealistic expectations and should reconsider their position on the stock.
Going long, Nike stock works for long-term investors as well as short-term tactical trades.
Yesterday’s report shows that the future growth is intact. So if I am bullish stocks in general, then there is no reason to expect NKE to fall alone. This is still the benchmark for all athletic footwear competitors if not all of retail.
Nike is a cut above the rest. It has led its industry for decades and it keeps upping the ante. They shine even in the face of controversies like we saw last year. Critics often contend that Under Armor (NYSE:UA) or Adidas (OTCMKTS:ADDYY) is eating its lunch but it never pans out that way. Nike still reigns supreme and by a long margin.
Bottom Line on Nike Stock
Valuation is not a concern since it sells at 32 price-to-earnings ratio and 3.5 times sales. NKE doesn’t really have a profitable comparable. UA still struggles with the zero profit line. But I like to compare it to Lululemon (NYSE:LULU) and NKE is 40% cheaper than that. They both are retail giants who control their inventory and labels tightly.
So from that sense, NKE is still a bargain. Yet the stock is still not frothy so there is room for upside. While Nike stock is out-performing the SPDR S&P Retail ETF (NYSEARCA:XRT), it was only up 14% year-to-date coming into the earnings. UA, Adidas and LULU are up three times as much for the same period. Clearly, Nike has some catching up to do.
So, buying Nike stock at these levels is a reasonable bet for the long term. It’s reasonably priced and has more upside potential than downside risk. So the thesis is as simple as it could be.
But since we do have to contend with binary headlines this weekend and for the coming weeks, don’t take a full position at the same time. It’s best to leave room to add in case the rhetoric from the economic war between the U.S. and China worsens.
In summary, Nike delivered another strong quarter despite the economic war with China and the movement there to boycott U.S. brands. Management did cite currency headwinds but they still guided well going forward so it’s not likely to create more problems. The U.S. Dollar is strong but it should weaken going forward, especially since the U.S. Federal Reserve will be cutting rates this summer.