Athletic apparel giant Nike (NYSE:NKE) was having a great 2019 until recently. Back in mid-July, NKE stock was up roughly 20% year-to-date, largely in-line the S&P 500’s 20% YTD gain. Unfortunately, escalating trade war tensions in August put a damper on Nike’s good year. NKE stock has since dropped 10%. The S&P 500 is down just 3% over the same time frame.
Year to date, the S&P 500 is now up 16%, while Nike stock is up just 10%.
In other words, thanks to U.S. President Donald Trump upping the trade war ante in early August with the threat of new tariffs on Chinese imports, Nike stock has gone from having a good year, to having a sub-par year.
This recent weakness in NKE stock is overstated. It won’t last, and it will be replaced by a strong end-of-year rally for three big reasons.
First, the fundamentals supporting Nike remain exceptionally favorable, and pave a path for NKE stock to hit $100 over the next twelve months. Second, the optics surrounding Nike and the trade war are set to materially improve into the end of 2019. Third, the technicals imply that NKE stock is on the verge of a generational buying opportunity.
As such, I’m bullish on NKE stock on this recent dip. This is a winning stock trading at an attractive discount, with huge catalysts on the horizon and a chart that says a big rebound is coming soon.
Nike’s Fundamentals Pave a Path Towards $100
The biggest reason to buy NKE stock on this recent dip is because the fundamentals remain very strong, and pave a path for huge upside in NKE stock over the next twelve months.
Nike is firing on all cylinders right now, which hasn’t always been the case. Back in 2015, German athletic apparel maker Adidas (OTCMKTS:ADDYY) paired up with celebrity musician Kanye West to capitalize on the athleisure trend by blending culture with sports (the partnership actually started in 2012, but 2015 was when Adidas launched the first Kanye shoe). It was a genius move. From mid-2015 to mid-2018, Adidas rattled off a streak of twelve consecutive quarters of double-digit, constant currency revenue growth.
This brilliant Adidas move had a negative impact on Nike. From 2015 to 2018, Nike’s constant currency revenue growth rate slowed from 14% to 4%. But, recognizing that they were losing share to Adidas, Nike launched Consumer Direct Offense in 2017, which focused on streamlining investment dollars into trend-setting metro areas, doubling down on direct sales, and accelerating the innovation pipeline.
Nike has since done all three of those things. And it has worked. Adidas’ constant currency growth rate has decelerated to 4% in 2019. Nike’s accelerated to 11%.
In other words, Nike is back. Usually, these fashion trends last several years. Fiscal 2019 was really the first year of this Nike-first trend. Thus, it increasingly appears that Nike is in the first few innings of a new above-trend growth ramp.
The athletic apparel market projects to grow at a 5%-7% rate into 2025/26. Nike should grow above that rate — probably around 7%-8%. Gross margins should trend higher due to strong consumer demand. Opex rates should fall gradually with revenue scale.
That paves a viable runway towards $6.75 in EPS by fiscal 2026. Based on historically average 25-times forward multiple, that equates to a 2025 price target of nearly $170. Discounted back by 10% per year, that implies a fiscal 2020 price target of roughly $105.
Trade War Optics Will Materially Improve NKE Stock
The second big reason to buy the dip in NKE stock is because trade war optics — which have killed the stock in August — will meaningfully improve into the end of the year.
My theory here is pretty simple. President Trump is all about winning the 2020 election. He knows that his odds of winning that election are highest if the U.S. economy is firing on all cylinders ahead of the election, especially since he has tied his presidency’s success to stock market highs and big GDP numbers. How does Trump get that “firing on all cylinders” economy ahead of the election? He needs low rates to juice the economy.
That’s why he has been so adamant about the Fed cutting rates. But, in late July, the Fed disappointed by cutting rates only 25 basis points and not sounding very dovish with respect to future rate cuts. The Fed did say, though, that the U.S.-China trade war is essentially the biggest risk to the U.S. economy. Who is behind that trade war? Trump. So, in theory, all Trump has to do to get the Fed to cut rates is temporarily accelerate the trade war.
He did just that — the very day after the Fed only cut rates by 25 basis points. That’s not a coincidence. Trump doesn’t want these tariffs to actually materialize and meaningfully damage the U.S. economy ahead of the 2020 election. He just wants the threat of them to create enough economic cross-currents to get the Fed to cut rates, at which point he will pull the tariff threats and reduce trade tensions.
The result? An economy firing on all cylinders heading into the 2020 election, supported by reduced trade tensions and juiced by low rates.
Given this framework, I think it is very likely that over the next few months, trade war optics improve dramatically. As they do, stocks that are at the epicenter of the trade war, like Nike stock, will bounce back in a big way.
Technicals Imply We Are on the Cusp of a Generational Buying Opportunity
The third big reason to buy the dip in NKE stock is that the technicals imply that we are on the cusp of a generational buying opportunity in Nike stock.
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Consider the chart. Over the past decade, NKE stock has been on a solid uptrend with a very strong multi-year support line that has held three times before. After each successful “test-and-hold” of this multi-year support line, NKE stock proceeded to rally in a big way over the subsequent several years.
NKE stock is on the verge of testing this support line again. If it does, history says that a successful test of the support line will precede a big multi-year rally in the stock.
Bottom Line on NKE Stock
Nike stock has been hit hard by the trade war over the past month. This recent weakness is creating a compelling buying opportunity into a high-quality stock supported by favorable fundamentals, optics, and technicals. As such, buying the trade war dip in NKE stock this month seems like the right move.
As of this writing, Luke Lango was long NKE.