This morning’s drop in the stock market left another bruise on Wall Street’s sentiment. As a result, the CBOE Volatility Index (VIX), a measure of fear, is at levels last seen during December 2018. The major indices have been making 3%-4% moves every day this week, which is not normal behavior. But instead of panicking, use this time to find bargains among proven companies.
Nike (NYSE:NKE) is one that has suffered greatly thanks to the coronavirus from China.
The bullish thesis is simple. Nike has survived and thrived through every crisis for over 40 years, so it has experience navigating periods of trepidation. From its highest point this year NKE stock fell 20%. The good news for the bulls is that it bounced quickly and erased almost half the losses. But the pain may not be over yet — and therein lie opportunities.
Before we look at the Nike specifics it’s important to address the elephant in the room — Covid-19. I am not an expert on viruses but I’m exercising my right to simple logic. The world is suffering from a tragic global epidemic and it’s freaking people out. World leaders have failed at educating us, so our imaginations are running wild, conjuring up far worse scenarios than what the end result will likely be.
I am hopeful and confident that although this virus is definitely a human tragedy, it is not going to be the slayer of global economic outlooks. The flu currently kills over 30,000 people every year so that’s a pandemic on a yearly basis. We don’t fear it, because we’ve seen it for years and we’re comfortable with its death rate.
As officials do more testing, it’s likely the death rate will drop below 2%. I went shopping this week and not once did I worry about what I was touching and who I was standing next to.
Nike Has Strong Fundamentals
The long-term bullish thesis on Nike is solid. However, with a forward price-earnings ratio of 32, it’s not cheap. On the other hand, it trades at 3.8 times sales, so it’s not exactly bloated.
Regardless, its valuation here does not scream “buy” or that it’s at a bottom. Trying to pick the perfect entry point in NKE stock is a fool’s errand. Cheap is not always the best criterion to seek. Instead, it is important to look at the bigger picture. And Nike’s bigger picture is still looking good.
Let’s look at history for some proof. Remember when Nike was under pressure when some football players decided not to stand for the national anthem? Nike stood its ground and emerged victorious. This is a management team that deserves the benefit of the doubt.
The current situation in China will likely cause supply disruptions and hurt sales. But there’s no proof that this is going to impact Nike’s business forever. When sentiment is this bad, it makes sense to start small positions, and NKE stock is a great candidate here.
NKE Stock Has Strong Support
Nike’s chart suggests that support is near. Want proof? Look at how hard NKE stock bounced from $85 per share. But when the VIX is this high, it is also important to know that there are no hard lines to trade.
The stock’s point of control over the last 12 months is near $87, so that is where buyers and sellers will be most active. These points of control tend to be sticky because they provide support and create congestion. I will also note that there is a second contested line at $84.
This means Nike has support, and even a back-up support line below. It will take a major change in the company’s fundamentals for those two levels to fail. Assuming a catastrophe does happen, there is a third line below near $80 per share.
None of these downward movements are my forecast, but they are supports the bulls can count on even in the worst-case scenario.
Fear the Black Swan (But This Is Not It)
Experts are calling this virus situation a “black swan” event. I challenge that because black swans strike out of nowhere and inflict harm really quickly. The virus situation started in December yet the markets continued setting new highs for another month. The selling has been methodical but is not accelerating on a collapse in U.S. bond yields. Stocks are just going for a ride.
My point here is that the shock value has already done its worst to NKE stock. It would take new headlines to cause another 10%-plus drop from its Feb. 28 lows.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
