Nike: A Buy or Sell?

Recently reporting their quarterly earnings, many investors look for a fair sized rally for this shoe making king. However, with the upcoming recession and implications that it might have on Nike (NKE) shares, I would be hesitant to purchase any more shares at such a high price during such a volatile period.

It’s true that Nike did something positive in their report a few days ago which propelled the stock by four percent the next day. However, this was also the first time in three quarters that Nike reported an EPS lower than expectations. While the surprise was low, Nike typically reports earnings well above analyst estimates, illustrating the potential decline of Nikes’ profits during the next possible few years. Already experiencing some negative margins from quarter to quarter, with yearly margins only mediocre at best, Nike looks to be an upsetting stock for investors in the months to come. Reaching a near record high this year, I can vouch that Nike is an overbought equity waiting to be shorted.

The reasoning for such an assertion can be based on the premise of what type of company Nike is. Selling sport shoes and other clothing products at an above market price may not be complacent with consumers with the upcoming economic downturn. As inflation worries have propelled the Federal Reserve to increase interest rates, a negative effect will occur for companies such as a decrease in purchases. Consequently, companies will have to compensate for the lack of sales by firing employees. This results in lower domestic income for Americans, creating even more negative effects for the economy. Because consumers will not spend at their previous rate, profits will fall for companies that sell products at high prices (like Nike) and will transcend the bad news to shareholders of their stock. As Nike perfectly fits this description, expect some announcements in the future, especially if there is a hard landing, of a lowering of guidance.

Historically speaking, when the recession of 2001 through 2003 took place, shares of Nike dropped dramatically to near 33% which is a big downfall for a large capitalization corporation. When the economy got back to a more prosperous state, shares of Nike rose because of increases in margins and earnings, placing Nike almost 100% ahead relative to the end of 2003. Will Nike follow a similar pattern when the next recession occurs? The topic is debatable, but Nike does seem to follow a relatively cyclical pattern determined by the economy and its fundamentals.

It is true that Nike has an excellent PE ratio of nearly 17 and a good dividend payout of 1.24 cents per share, but with the negativity of the economy conspicuously hurting the fundamentals of Nike, and a technical pattern similar to that of a cyclical stock, I would be very wary of buying any shares of Nike at the current time. If you were lucky and have shares of Nike that you purchased earlier, I would advise selling these shares, collecting your capital gains, and buying shares of Nike back when the economy goes through this recessio

Leave a Reply

Your email address will not be published. Required fields are marked *