The pandemic hit the global reset button on many aspects of our lives, and especially on Wall Street. Because of that, I now refer to the contention levels from it when examining investments. Today I will do this for Nike (NYSE:NKE) stock to evaluate the possibility of an entry point.
But first we must acknowledge the external risks that are currently present. On one hand, investors have been fretting the Federal Reserve’s rate hike cycle. They have already announced a hike coming next week and the end of the taper. But it is the frequency of subsequent actions that worries traders. The experts already expect one a month for the rest of the year. I disagree, but the threat is there.
More recently, the events in the Ukraine have taken center stage, and for good reason. The world is on the verge of gravely exacerbating a war situation. Efforts to de-escalate matters have not yielded tangible results, so things could get ugly quickly. My assumption is that they will eventually come to some sort of a compromise. It will take time, so going all into a position in NKE stock is reckless.
The last time I suggested an entry into it NKE stock was one weekly tick away from its March 2020 bottom. If you bought it at its bottom and sold it at its November 2021 peak, you had a nearly 200% return. So far, NKE has lost 30% of its value from its peak, but it is still not a clear bottom.
Fundamentally, management has earned all the kudos it needs with investors. Being 58 years old, the company has navigated through numerous challenges internal and external. It has even managed to capitalize on crisis situations. Not even the challenges from the pandemic slowed it down.
Nike has grown its income by 53% since 2019, with a $6.2 billion net income. In the process, they generate $6.7 billion cash from their operations. This will help them overcome whatever rate hike cycle we face. Moreover, valuation will not be a problem because it is reasonable. While the nearly 30 price-to-earnings ratio is not cheap, it’s not a reason to sell it either. Overall, having a 4.9 price-to-sales suggest it’s a bit cheaper than Apple (NASDAQ:AAPL).
NKE Stock Has Support But Delicate
This brings us back to the price action in NKE stock as the tiebreaker. On the one hand, I like that it’s falling into October of 2020 support levels. However, I still worry that it is still 14% above the 2020 neckline. Remember earlier I stated that I use it as a point of reference because of binary nature.
For example, Meta (NASDAQ:FB) Netflix (NASDAQ:NFLX) and PayPal (NASDAQ:PYPL) have already gone inside their pandemic ranges. This leaves me wondering if Nike is going to do the same. For the next few weeks, it is likely to follow the general market direction.
Most immediately, investors can use the floor below from March 8 as a stop loss level. The short-term internal technical signs suggest that support will hold. But since we are dealing with so many serious headlines, I would leave room for doubt. I can easily accomplish this easily by lowering my conviction level on purpose. If a rebound comes, I also expect sellers lurking near $136 through $145 per share. Management will have the opportunity to give the stock some help.
Later this month, Nike will report earnings, but judging by the DocuSign (NASDAQ:DOCU) reaction last night the bears may not be done. This month, the sellers have all the tailwinds they need, so the buyers are at the disadvantage. Therefore, Nike management better tell a great story to capture the investor imagination.
If I am already long NKE stock, I should resist adding to it going into earnings. The short-term reaction to these is binary and has little to do with the quality of the results. This is not an opinion but a fact, which you can verify yourself. Their last four events were two up and two down. If you examine the results of each you will find them all four outstanding.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
