Among the top consumer discretionary stocks, Nike (NKE) has a world-class brand and market share in the footwear and apparel space that’s hard to come by.
In years past, this dynamic has led to a pretty sizable valuation premium, which many investors may have expected to remain in place. But with the rise of tariffs and other industry headwinds, this valuation premium has been degraded to a certain extent. Now, investors are left wondering if all the magic is gone for this iconic brand as competition continues to heat up in this space.
I’m not sure that’s the case. Nike also has recent dynamics at play, such as a recent note that highlights a large $3 million purchase of NKE stock by Apple (AAPL) CEO (and Nike lead independent director) Tim Cook.
Let’s dive into this purchase, and whether or not investors would do well to follow Tim Cook into this potentially undervalued name right now.
In my view, the move by Apple CEO Tim Cook to purchase NKE stock is indicative that there’s some pretty decent alignment among some of the greatest investors in the game. Indeed, these investors may be starting to smell opportunity. Given Nike’s rather dramatic recent decline of 15% on a year-to-date (YTD) basis (inclusive of a recent rally), that’s the type of performance that could get some investors perking up in their chairs.
Why? Well, having a look at Nike’s fundamentals, there’s still a lot to like about this company’s operating model. Tariffs and other operational headwinds aside, this is still a consumer discretionary stock with incredible pricing power. The ability to raise prices for special releases, or launch new investor-edition sneaker lines and upgraded apparel options, allows the company to generate outsized margins it can reinvest into its production and product development processes. That’s the flywheel effect that has driven this business to the levels it has in recent years.
I’d expect these trends to continue, which should drive Nike’s margins and overall earnings growth higher. If that’s the case, NKE stock trading at around 35 times earnings could actually be a bargain.
