Nike (NKE): This Stock is Ready to Run… and Fast

Oftentimes, we’re told to ignore 52-week-lows on the idea that stocks making new lows will continue to make new lows. 

We’re told, “Never buy a stock hitting a 52-week low…”

“Stocks in downtrends tend to stay in downtrends…”

“It’s too risky… It’s not safe…”

“Any stock hitting a 52-week low will always be weak…”

Or, “nothing is more destructive to amateur investors than thinking that a stock trading near a 52-week low is a good buy…”

But that’s not true.  In fact, it’s laughable. 

The truth of the matter is that such lows can highlight great opportunity.

Look at Nike (NKE) for example. 

In recent days, it fell in sympathy with Under Armour’s warning of slower growth. 

But the sell-off has gotten way out of hand.

It’s now down about 20% on the year on fears of slowing sector growth. 

However, there are reasons to believe the pullback is creating a strong long-term opportunity for patient investors.  We must remember that earnings are still solid.  In fact, during the quarter ending September 2016, revenue was up 8% year over year.

What drove the stock down was fear of crushing levels of inventory. 

Granted, the company did end the quarter with $123 billion in future orders for delivery from September 2016 to September 2017.

At first sight, that’s disastrous.  But it’s nothing to get excited about or send a stock down 20% over.  First of all, the company is digging its way out. 

As Trevor Edwards Nike Brand President noted:

“We also made great progress against clearing excess inventory within the quarter and we’re seeing the benefit of bringing new product into the clean, full price in-line channels. Looking forward, we will continue to manage the flow of product into the market as we expand on an already healthy in-line marketplace.”

Second, the burden of future orders is significantly less impactful than it has been.

Last year, the company outlined a goal of reaching $50 billion in revenue by 2020, an increase on the top line of $20 billion from $30.6 billion in 2015. Half of that growth is expected to come from the direct-to-consumer (DTC) channel, which includes Nike's own stores and e-commerce as it expects DTC to grow from $6.6 billion in 2015 to $16 billion in 2020,” as pointed out by Motley Fool. “In other words, the burden on futures orders or wholesale to deliver growth will be significantly less than it has been in the past.  E-commerce will be a key driver of that growth -- it is expected to reach $7 billion by that year. 

Fundamentally, NKE trades at 19x forward earnings, which is far less expensive than that of Under Armour’s 44.11.  NKE also has far better growth on the horizon that UA is currently warning about, as well. 

Technically, NKE is severely undervalued, too, after catching support.  Money Flow, MACD and RSI are all deep in oversold territory.  I’d like to see a bounce to at least $56, near-term.

Trade it smart, though.

Remember, the markets are still greatly unorganized and highly volatile with the nearing elections, OPEC meeting, and the potential for a December rate hike.