Key points
- Shares struggled after last month’s earnings report, but have rallied in the past week.
- Despite the negative outlook, analysts remain cautiously bullish and the stock is trading below most price targets.
- From a valuation perspective as well as a technical perspective, Nike trades favorably.
- 5 stocks we like best about Lululemon Athletica
For a stock that could do no wrong for a long time, it’s been a rough couple of months Nike Inc. NYSE: DI. A mixed earnings report last month, including management’s feared weak forecast, was enough to condemn Big Swoosh shares to their biggest daily decline in years. While the rest of the stock market was enjoying a banner end to the year, Nike shares were returning to the 2019 levels they are currently trading at.
Despite some promising efforts, they have gone nowhere as of mid-2022, and investors must be impatient. However, for those of us on the sidelines, it’s a great time to consider whether an entry opportunity may open up. Let’s dive in.
When a stock misses earnings expectations and warns about future performance, much of the worst-case scenario is quickly priced into the stock. It rarely happens in a single session, but typically over a few weeks as the numbers are fully digested. Then, as Wall Street’s attention shifts to the next big story, interest wanes and the stock is left spinning without much volume anyway.
Lateral trading
This is the case with Nike shares, which hit a temporary low last week and have since traded sideways in a tight range. That low, around the $100 mark, needs to be helped if the stock hopes to break the current downtrend in the near term, but if Nike stock can do that, then we could see a decent recovery rally.
Earlier this week, the Morgan Stanley team signaled this potential when it named Nike as a top pick for exceptional returns in 2024. They see relative strength in the company’s earnings revisions, which almost always precede upside performance , especially when a title has been knocked down. Morgan Stanley is not alone in its bullish optimism either. While several Wall Street heavyweights struck a cautious tone in the aftermath of December’s results, none went so far as to downgrade Nike stock to a full “sell” rating.
Indeed, we have mostly seen Buy ratings reiterated, albeit with a moderate reduction in price target. However, with Nike shares now down nearly 20% from their pre-earnings high, the stock is trading well below nearly all of these updated price targets.
HSBC, for example, said this week that it is now eyeing $115, which suggests there is at least 15% upside to Nike’s current trading level. JPMorgan’s updated price target is $128, an upside of nearly double.
Getting involved
So, we’re inclined to think that if Nike can continue to consolidate, its stock will naturally turn north soon. It’s still a great business with an enviable moat and good exposure to the Chinese market. The company’s innovation remains a bullish factor internally, while overall quarterly revenues are at record levels. The slowdown in growth is worrying, but Nike has proven capable of changing direction in the past, and has the track record to suggest this time will be no different.
Sure, there are better stocks out there. Lululemon Athletica Inc. NASDAQ: LULU is undoubtedly one of its closest competitors in the athleisure space, but in terms of valuation Nike is much more attractive. Lululemon’s price-to-earnings (PE) ratio of 60 is more than double that of Nike, which strengthens the case that there’s a bargain on the table with Nike stock here.
Technically, the stock’s Relative Strength Index (RSI) is near oversold levels, while the MACD is on the verge of a bullish crossover. Together, these indicators alone would point to an impending rally in the stock, so watch carefully and be prepared to back the truck.
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