Our Analysis of NIKE Inc. (NYSE: NKE)

Earlier this summer, we began sharing our analysis of some of the most well-known and widely owned stocks.

We did so utilizing our "Quantamental" research approach, refined over three decades.

This approach combines "quantitative" analysis, which consists mostly of technical analysis, with "fundamental" analysis of the company's operating metrics.

We developed this approach in our thirty years as professional investors.

We have simplified our approach to three simple analyses that can cover 90% of the analysis of any individual stock.

To initiate this process, we have primarily focused on the “Magnificent Seven” group of leading technology stocks.

This week, we are taking a different approach and sharing our analysis of athletic footwear and apparel giant Nike, Inc. (NYSE: NKE).

With the recent investment filing of famed activist investor Bill Ackman's ownership, we thought it would be interesting to examine the stock.

Our analysis below is not a formal recommendation on the stock. Based on our analysis, we are giving our views of what is most likely to happen from here.

Here is the analysis…

1. Technical Analysis

NKE is quite distinct from the other names that we have analyzed recently in that it has definitively NOT been a good stock in the last few years.

Here is a chart of the stock price going back a decade…

The stock had a great run going into the COVID and post-COVID period. It went from a little more than $30 per share to a high of almost $180 in late 2021.

Since then, however, the stock has been cut in half.

We usually look to buy stocks that have been going up and not down. We prefer to own stocks that show investor interest and momentum.

Until recently, NKE certainly didn’t fit this description.

Here is a chart of the stock price over the last year, along with the "relative strength index" (RSI).

The stock has been absolutely destroyed. It also reached extreme levels of oversold as measured by the RSI.

We don't show volume on this chart, but the most recent sell-off in late June was also on massive volume.

While NKE doesn't fit our criteria for a momentum stock, it does have some technical aspects that we find interesting.

The significant drop on huge volume can be a good setup for the stock to begin to recover.

You can also see the beginning of a recovery last week when it became known that famed activist investor Bill Ackman of Pershing Square had bought considerable stock.

We won't say that we think the stock is a "buy" on a technical basis, but we do think it could become more interesting.

TECHNICAL ANALYSIS = AVOID.

2. Earnings Revisions

Our view is that there is ONE single factor that has the greatest correlation to a stock price in the near term. That factor is EARNINGS REVISIONS.

Looking at the price history of NKE stock, you can guess how those have been going. Here is that chart…

Several years ago, analysts had expected NKE to earn more than $6.50 per share, but now, that number is slightly more than $3.00 per share.

NKE has seen a continual wave of negative earnings revisions, which has pushed the stock down.

The issues around their earnings are well documented.

Around the COVID period, the company moved away from its historical wholesale partners and focused more on its "Direct-to-Consumer" or "DTC" business.

In theory, this could be a more profitable channel for them, and the company would have more control. The issue, though, is that in the post-COVID world, as we returned to normalcy (and went to stores again), the strength of online shopping weakened.

The company’s wholesale partners also quickly replaced NKE products with those of their competitors. When consumers returned to the stores, they had products to buy—they just weren't NKE products.

The company has recognized this and is looking to restart its wholesale relationships.

Do we think they will be successful?

We don’t know. NKE is one of the world's most powerful brand names and has a long history of success.

We suspect they will eventually be successful and see positive earnings revisions once again.

However, we would rather WAIT for that to happen than try to anticipate it.

NKE has almost $50 billion in revenue or more than double that of its largest competitor in athletic apparel, Adidas AG (OTC: ADDYY).

We believe in the brand and the track record of success, but this could take some time.

We would rather wait to see evidence of a turnaround and buy the stock up from current levels than get involved now.

EARNINGS REVISIONS = AVOID

3. Earnings Growth

The final measure we focus on is the actual growth in earnings.

With their issues over the last few years, the company has had difficulty posting earnings growth. Here is that table…

You can see the impact of the COVID period. First, EPS was hit as brick-and-mortar retailers were shut down, and then it recovered with the move to DTC.

Since then, however, the earnings have been stable.

We noted how these estimates have decreased dramatically, but we think the company's maintained EPS around these levels is constructive.

The real question is, will the company be able to grow its EPS from here?

In our analysis, we almost never discuss valuation, but we think it can be an interesting input when dealing with stocks that are down.

Here is a table showing the stock's price-to-earnings ratio, or "P/E Ratio," going back to the mid-1980s…

The black line is the P/E, and you can see that up until the last few years, the company had traded between 15x to 25x EPS. It was only with the recent growth that the multiple expanded to well over 40x EPS.

Right now, the stock is at the upper end of that historical boundary, which doesn't give us much comfort that it will not go lower.

EARNINGS GROWTH = AVOID

Conclusion

We appreciate the interest from Bill Ackman, who has a good track record of investing in great brands. His investment in Chipotle Mexican Grill, Inc. (NYSE: CMG) is a great example of doing so successfully.

We think he might be onto something with this great brand, but our investing discipline dictates that we wait for the evidence to build before pursuing the idea.

We would continue to sit on the sidelines with NKE here.