Among top consumer discretionary stocks, Nike (NKE) has a world-class brand and market share in the footwear and apparel space that is hard to come by.
In past years, this dynamic has led to a fairly sizable valuation premium, which many investors expected to persist. But with rising tariffs and other obstacles to the industry, this valuation premium has degraded to some extent. Now, investors are wondering if all the magic is gone for this iconic brand as competition continues to increase in this space.
I’m not sure that’s the case. Nike also has recent dynamics at play, such as a recent note highlighting a large $3 million purchase of NKE stock by Apple ( AAPL ) CEO (and Nike lead independent director) Tim Cook.
Let’s dive deeper into this buy and whether or not investors would be wise to follow Tim Cook in this potentially undervalued name right now.
In my opinion, Apple CEO Tim Cook’s decision to buy NKE stock is indicative that there is some pretty decent alignment among some of the biggest investors in the game. In fact, these investors may be starting to smell opportunities. Given Nike’s recent fairly dramatic decline of 15% so far this year (including a recent rally), that’s the kind of performance that could make some investors sit up in their chairs.
Because? Well, if we take a look at Nike’s fundamentals, there is still a lot to like about this company’s operating model. Tariffs and other operational hurdles aside, this is still a consumer discretionary stock with incredible pricing power. The ability to increase prices on special releases, or launch new investor sneaker lines and upgraded apparel options, allows the company to generate huge margins that it can reinvest in its production and product development processes. That is the flywheel effect that has driven this business to the levels it has had in recent years.
I would expect these trends to continue, which should boost Nike’s margins and overall earnings growth. If that’s the case, NKE stock trading at around 35 times earnings could be a bargain.
