Nike Stock: A Solid Buy During A Dip

Shares of Nike (NYSE: NKE) have traded largely sideways since December and are down around 7% in the past week. They’re not alone, however. Equity markets as a whole have taken a tumble in the last few sessions, with the Nasdaq index logging its worst day since October on Thursday. It’s down a full 8% from its most recent all-time high, set earlier this month, and pre-market trading on Friday suggests there’s room for it to fall lower.

For now, this weakness looks like to be little more than a short-term correction. There are some concerns that the recent pop in yields is signaling faster than expected inflation growth, which could dampen investors appetites for richly valued growth stocks, hence the weakness.

But improved optimism around the ongoing economic recovery from the COVID pandemic, driven by the continued vaccine rollout, are being pointed to as the main factors behind the jump in interest rates, and these have to be bullish. That being said, we could still be looking at a period of volatility however while Wall Street interprets the bond markets, which means there should be some attractive entry opportunities opening up in quality stocks.

Long Term Potential

Nike for one will be on a lot of investors’ watchlists. A price-to-earnings ratio of 77 is definitely on the high side and could mean their shares are in for a haircut in the near term. If so, good for us. This is a $170 billion consumer company that managed to take its shares to multiple all-time highs during the biggest recession in history and is still managing to beat analyst expectations quarter after quarter. The pandemic was in many ways the final piece of Nike’s transition to a 21st-century company, as they grew their digital sales far beyond any previous forecasts. Case in point; in December’s fiscal Q2 report, digital sales were up 84% year on year.

On Thursday, HSBC made it clear they weren’t too worried about the current bout of selling and came out with a fresh upgrade to shares of the Oregon headquartered company. They moved Nike shares from Hold to a Buy rating having identified the strong potential for upside in the company’s top-line growth and margin expansion.

In a note to investors they said: "for a very long time, we have believed that Nike's business model was essentially to reinvest all excess profits to ensure the group would continue to take market share from peers. More recently, however, given elements of scale and benefits of higher-margin channels (online, DTC, Asia), it has become clear that the debate around sales or EBIT is indeed no longer an either-or – Nike can have both."

Watch For An Entry

As an investor, what more do you really want to hear? Shares have some near term support around the $130 mark but don’t be surprised if we see them dip further. There are more than a few investors hoping for a nice cut to the share price to allow for a juicy entry. The $120s isn’t unreasonable if the selloff picks up some steam into next week, this would put them back towards where they were at the end of Q3.

Nike isn’t going anywhere anytime soon. With one of the strongest consumer brands out there they’ve shown investors that they can hit all time highs both before a pandemic and during it. There’s no doubt they’re going to show us how they can hit them after a pandemic as well in the coming months.