Why picking Adidas over Nike is a safe bet

Key Points

• The apparel industry is slowly making it out of its inventory issue slumps, leaving one leading name promising the most upside in the space.
• Adidas has left all uncertainty behind, leaving markets to place the utmost faith in the future potential of the stock.
• The market and analysts align with where the stock needs to be, so don't miss this next rally.

There's nothing like the fresh smell of opportunity in the morning, and what better way to couple today's winning pick than with a cup of coffee? If you are already caffeinated, this deal will make all the more sense to you. Do yourself a favor and get comfortable because you are about to finish the year strong.

The consumer discretionary sector is the only thing pushing the economy onward, as the recent GDP growth rate beat was accredited to consumer activity. This may be why the Consumer Discretionary Select Sector SPDR Fund NYSEARCA: XLY has performed 26.2% so far into 2023, outperforming the market by 11.5%.

Well, within this stock universe, there is an opportunity ripe for the taking; some of it will make sense straight away, and some of it will really leave your head scratching. Whichever happens, the important fact is that there is money to be made in Adidas OTCMKTS: ADDYY.

Markets like certainty 

Who doesn't, right? But when it comes to financial markets, even an ounce of uncertainty can send the stock price of an otherwise indestructible business down the toilet; just look at Walt Disney NYSE: DIS and its dismal decline over the uncertainty of unions and digital content trends.

The same unfortunate events affected one of the apparel industry's biggest names. Adidas stock had declined by more than 75.0% from its all-time high of $199.4, why? Issues that affected the whole industry, such as lack of inventory control and others, but there was one that hit Adidas specifically hard.

An issue spurred between eccentric music artist Kanye West and the company created significant uncertainties around an otherwise celebrated collaboration that led to the 'Yeezy' footwear line. And as you know, uncertainty can cause stock prices to dive.

Now that some of these conflicts have been resolved between the apparel brand and the artist, markets seem more specific on what the financials will look like for the firm; in fact, the preliminary third quarter 2023 earnings results point to that being the case.

Gross margins and previous inventory issues have significantly improved, "positively impacted by the sale of parts of its remaining Yeezy inventory..." Uncertainty? Perhaps still some left, but nothing like it was before. Has it affected the stock in any way? You bet.

Bullish outlooks

When it comes to price momentum lately, Adidas stock is nothing but bullish. The stock is trading at 90% of its 52-week high price, oddly close to creating a bull market and breaking away into a new high for the year.

This is all good in itself, but it must be balanced against other forces in the sector, and who better to bring into question than Nike NYSE: NKE themselves? Nike is right there with Adidas, at 83.0% of its 52-week high; nice try, but the momentum is still with Adidas.

Onto market votes, which are represented by the level of valuation multiples being assigned to specific names relative to the sector. In this case, the forward price-to-earnings ratio will be used, which seeks to value the next twelve months of earnings.

The apparel industry trades at an average multiple of 13.2x; Nike's? Its massive brand moat and successful track record allow it to command a higher 24.8x, a premium of 87.4% over the sector. Keyword 'premium': markets will only be willing to overpay for a stock if they perceive it to have higher quality or potential earnings growth.

This is why Adidas is being rewarded with a much richer 44.3x multiple, not only because markets are now more confident of its financial situation but because analysts expect EPS to grow by 564.4% in the next twelve months.

This growth expectation could be tied to the price target of $147.5 a share, implying a massive 60.0% upside from today's prices. Meanwhile, Nike analysts only expect earnings to grow by 17.4%, which makes sense as to why they are only placing a - still decent, though smaller - upside of 12.1% in the stock.

So, there you have it, price action indicating bullish momentum and financials that seem to be back on track to bring this stock back to its former glory. Moreover, the company is set to report its quarterly earnings this week, and the market will probably be proved right in its justification for overpaying for this stock.