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How Chairman Mao’s Legacy May Be Helping Nike Stock

With the headlines increasingly turning negative again on the U.S.-China trade war, Nike (NYSE:NKE) appeared destined to disappoint. Although the “swoosh” brand is an iconic representation of American capitalism, at the end of the day, it is a consumer-sensitive company. That fact has made many investors nervous about the longer-term prospects of the Nike stock price.

Source: mimohe / Shutterstock.com

Evidently, those concerns were completely unfounded. Earlier this week, the athletic apparel giant released its results for its fiscal first quarter of 2020. To borrow a phrase from research firm Jefferies, Nike “crushed it.” Thanks to this one headline, NKE stock transitioned immediately from a worrisome investment into a must-have equity.

Better yet, this was no hyperbole. Against a consensus per-share profitability target of 70 cents, Nike delivered an earnings per share of 86 cents. That was a nearly 23% positive surprise. On the revenue front, the apparel maker rang up $10.7 billion, exceeding estimates for $10.4 billion. Suddenly, no one could get enough of the company, driving up the Nike stock price.

Moreover, instead of looking for risk factors that could trip up shares, sentiment shifted toward justifying their newfound value. For instance, analysts credited Nike’s out-of-the-box thinking for some of the earnings beat. Last month, the apparel maker bought out predictive analytics firm Celect. This acquisition enables Nike to get its product marketing and distribution down to a science.

Translation: There’s more to NKE stock than just this fiscal outperformance.

And while such digital endeavors certainly boost prospects for Nike stock, I think another factor is more relevant: the longstanding influence of Mao Zedong.

Nike Stock and Chairman Mao

According to every instinctual reflex, the ongoing and bitter trade war has clouded international consumer investments like NKE stock. One only needs to look at the ridiculous volatility of competitor Under Armour (NYSE:UA, NYSE:UAA) to appreciate the risks.

Furthermore, both sides of the trade war have stoked nationalistic emotions. No stranger to such beliefs, President Donald Trump doubled down on them recently at the United Nations General Assembly. Trump’s counterpart, Chinese President Xi Jinping, has equally benefitted from nationalism, if not more so.

In this context, Nike stock appeared troubled. After all, the underlying organization is significantly levered to Chinese consumers. The fiscal Q1 earnings report would have looked much different without them.

So why then are the Chinese supporting Nike, and indirectly NKE stock when they have every reason not to? It turns out, we can thank the founding father of the People’s Republic of China, Mao Zedong.

More commonly known as Chairman Mao, he ruled his nation with an iron fist. However, Mao had a soft spot for basketball. In fact, Mao’s support ran so deeply that Meng Wang, Tencent analyst and commentator, stated that “Basketball is a part of the Chinese culture.”

And while Nike is associated with many sports, it has a dominating presence with basketball. Particularly, the company’s Air Jordan models have become as iconic as a can of Coca-Cola (NYSE:KO). But the distinguishing factor for Nike, and by extension, Nike stock, is demand: The Chinese consumer loves Air Jordans and anything to do with basketball.

Plus, Nike products hit a pricing sweet spot. They’re expensive enough to command respect for the brand, yet they’re also affordable all things considered. Thus, as the earnings results showed, China will continue to remain a viable market for Nike.

NKE Stock Is Ideally Positioned

History may not always repeat exactly, but it at least rhymes. Thus, Nike stock may very well have a reprieve in the trade war. As I cited earlier, basketball has become a part of the Chinese cultural DNA.

Keep in mind that even during China’s bloody Cultural Revolution, the very American sport stood strong. As far as I know, the trade war is a war in name only. If the Chinese loved basketball so dearly during social upheaval, I’m sure they’ll cling to their Air Jordans today.

Finally, NKE stock is simply well positioned relative to the competition. Under Armour is at risk of going under. Adidas (OTCMKTS:ADDYY) is doing well overall, but has recently suffered negative trading. By continuing its digital marketing initiatives and with loyal support from the Chinese, Nike is a positive anomaly in an otherwise sour segment.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/09/nike-stock-bullish-chairman-mao/.

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