Key points
- The apparel industry has been heating up lately, but not all stocks are created equal. That’s why Nike is the best choice.
- Wall Street analysts are now in trouble and can easily justify their increases in price targets and EPS projections.
- Nike is a cut above its competitors. Its size and international exposure make it a prime target for stability and growth.
- 5 stocks we like best about Lululemon Athletica
Uncertain times in the stock market tend to push wealthy investors and the institutions that typically manage their money into safer, low-beta stocks with a good history. Today, the apparel sector could be a top recommendation for investment houses like Fisher Asset Management. While it is possible to blindly pick stocks in this space and make a decent profit, it is wise to only side with the best in this cycle.
You will see how the entire macroeconomic landscape in the United States, especially with the uncertain timing related to the interest rate cuts proposed by the Federal Reserve (Fed), makes stocks leading the sector as Nike Inc. NYSE: DI ones that give you the stability you need with the same growth you’d expect from a smaller tech stock.
But before we delve into why Nike may be the safest stock to find growth in this cycle, you should understand the reasons behind Wall Street analysts’ preference in it. You’ll get a feel for the “top-down” analysis these professional traders use to find compelling opportunities, so get ready to dive deeper and analyze the path to Nike.
A good idea
That’s why some believe investing in Nike is a good idea. But what constitutes a good idea for large trading companies? Well, it all starts with understanding the economic environment you currently operate in. While you can check thousands of sources to develop a thesis, here’s a start.
One of the most followed indicators for idea generation is the ISM manufacturing PMI index. Considered as a trend of the last three months (an entire quarter), the apparel industry is setting the rules for a potential manufacturing sector breakout.
The entire space contracted heavily in December, but has seen increasingly aggressive expansion readings since then. This explains the flat December performance for the SPDR fund for selected consumer discretionary sectors NYSEARCA: XLYfollowed by a rally up to 7% in the January-February period.
However, not all clothing stocks are created equal. Some bet they like the names Ermenegildo Zegna New York Stock Exchange: ZGN could see a double-digit rally next quarter. On the contrary, others like it Tapestry Inc. NYSE:TPR don’t look so attractive.
This is due to their revenue exposure. If the Fed cuts interest rates, the dollar index could fall against other foreign currencies. This would be bad for domestic demand and stocks like Tapestry, which gets most of its revenue from the US market, could face some headwinds.
On the other hand, Zegna derives the majority (more than 65%) of its revenue from international sales, which would see a boost from a weaker dollar. For this same reason, Nike’s size and international penetration earns analyst love and some institutional cash to match.
Just update it
You can imagine some Wall Street analysts saying this to each other as they choose to raise Nike’s price targets. Those a JP Morgan Chase & Co. New York Stock Exchange: JPM see a valuation as high as $128 per share for Nike stock, expecting a 26% rally from today’s prices.
Considering Nike’s massive market capitalization of $150 billion, double-digit rallies must come from high-conviction projections. While the rest of the industry is set to grow their earnings per share (EPS) by an average of 12% next year, these analysts expect Nike’s to top nearly 17%.
A worthy competitor is found Lululemon Athletics NASDAQ: LULU, but the story remains the same. Focusing its sales in the United States, the stock requires upside of just 8% as analysts assign a price target of $494 today. Furthermore, it trades at 88% of its 52-week high when Nike gives you one 79% off its 52-week high price.
Another example of the effect of sales exposure and today’s market outlook is Deckers Outdoor Co. NYSE: BRIDGE. Concentrating the majority of sales in the United States, the additional currency risk is prompting analysts to set a 4% downside to the stock price target of $855.
The situation is now evident, and one catalyst you may be looking for is the upcoming quarterly earnings announcement this week.
Knowing what you know now, it wouldn’t be a surprise to see more future guidance from management, especially as the industry continues to heat up and international sales come to boost EPS for Nike next quarter.
Before you consider Lululemon Athletica, you’ll want to hear this.
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