Why Investors Should Ignore Nike's (NKE) 'Squall in a Sneaker'
Nike (NKE) is in the news once again. Their decision to discontinue a range of sneakers that carried an old version of the American flag is causing another wave of outrage among some people, especially as it was reportedly made at the request of Colin Kaepernick and came in the week of the Fourth of July holiday.
For investors though, this is the kind of story that should have no bearing at all on the decision as to whether to own, or for that matter to not own, the stock.
Call me an old cynic if you will, but the timing of the decision and the invocation of Kaepernick’s name look anything but accidental, coming as they do from a company which has always thrived on controversy and the publicity that accompanies it. Nike understands that in an industry as competitive and fickle as sports fashion, controversy is never a bad thing.
This particular controversy will no doubt lead to another call to boycott the company’s products, but that will only appeal to those who are already doing so based on the fact that Kaepernick is already used in their advertising. When that first became an issue back in September of last year, I said that the resulting pullback in the stock would be an opportunity, and sure enough, NKE gained nearly ten percent in the two weeks that followed.
Now, as then, this will all prove to be a tempest in a teacup, or perhaps more appropriately, a squall in a sneaker.
What will decide the future of NKE, both in the near and far terms, is the ability of Nike to grow sales and profits in a market that looks increasingly saturated, and that depends on a couple of other factors. Let’s not forget that important as the U.S. market is, Nike is a global company. Trade disputes and tariffs and their effects on global growth will have far more of an impact on the stock than this decision.
So, if you believe that the resumption of trade talks with China make a quick resolution to the trade war likely, and/or that the Fed will cut rates a couple of times this year, stimulating the global as well as the U.S. economies, then Nike has potential. The problem with the stock is that if those two things happen, there will be others that offer better opportunities.
If they don’t however, NKE will remain mired at these levels at best, and potential is limited. Yet, despite those limitations, Nike is currently trading at around 34x trailing earnings, making it expensive relative to the broader market, which averages around 23x.
The need for a perfect storm of positive news to achieve growth and the lack of potential for multiple expansion are good reasons not to own the stock. The decision to pull a range of sneakers that give offense to a core customer group is not and should not be a factor in investing decisions.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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