Americans love to get out and play. With a recent sports industry report showing that participation in mixed martial arts, adventure racing, triathlons, rugby and lacrosse rapidly rose in the U.S. over the past couple of years, retailers and brands that cater to these niches should see a boost as long as they're riding the trends. (For related reading, see: Top ETFs to Trade the Retail Revolution.)
However, while investing in companies that sell sporting goods and related gear seems like a no-brainer — even during tough economic times, people are still going to enjoy their time off by participating in their favorite hobbies, which makes these firms somewhat recession-resistant — know that consumers tend to use old equipment instead of upgrading as a way to pinch pennies. When difficult economic times strike, consumers find ways to cut their discretionary spending. (For related reading, see: 4 Characteristics of Recession-Proof Companies.)
The stocks listed below should not be seen as recession-resistant in any way. In fact, the majority of them would be hit hard if the stock market faltered. But given that sports as a hobby is here to stay, there are a few stocks that offer more resiliency than others. Read on. (For related reading, see: The 4 R's of Investing in Retail.)
All numbers below as of May 28, 2015.
Dick's Sporting Goods
Dick's Sporting Goods Inc. (DKS), the large national sporting goods chain, has delivered consistent top- and bottom-line growth annually. Investors have shown their appreciation, driving the stock price 21.57% over the past 12 months. Additionally, not many people want to bet against Dick’s. It has a short position of 1.70%. Dick’s also offers a dividend yield of 1.00%.
Dick’s is going beyond its former growth avenues. Consumers are shopping online more often by the day. For Dick's, in the first quarter, e-commerce represented 8.5% of sales versus 7.0% in the year-ago quarter. This is a positive sign. Dick’s is also moving away from eBay Enterprises, the e-commerce firm that counts Dick's as a client. By having its own platform, Dick’s aims to boost sales and profit. The move should also allow Dick’s to offer more industry differentiation, agility, development control, and access to customer data.
Dick’s is a highly-efficient company, but it does not offer resiliency.
Foot Locker, Inc. (FL) recently beat expectations on the top line and has been delivering consistent top- and bottom-line growth annually. The stock has appreciated 31.13% over the past year and it currently yields 1.60%. However, the short position is 7.30%, meaning a lot more money is betting against it. This is likely because unlike the large sports chains, Foot Locker is primarily focused on footwear, making its lack of product diversification a negative factor for many investors.
Like Dick’s and Foot Locker, athletic apparel maker Under Armour, Inc. (UA) has delivered consistent top- and bottom-line growth on annually. The stock has appreciated 53.67% over the past year. There is no yield, but any investor would take that type of stock appreciation over a generous yield. (For more, see: 5 Things Under Armour Wants You to Know.)
Under Armour is a machine, consistently finding ways to target almost every age demographic. Thanks to excellent management, a prudent sponsorship strategy and a don’t-dare-bet-against-us in-house culture, Under Armour has potential to grow enough to somewhat offset the impact of a broad market decline. (For more, see: How Under Armour Stands Up to Its Huge Rivals.)
Unfortunately, the stock would likely depreciate as investors run for safety, but this would only present a phenomenal buying opportunity. (For more, see: 3 Reasons Why Under Armour Stock Could Fall.)
People crave community; they love to be a part of something. Lululemon Athletica Inc. (LULU), the yoga-inspired athletic wear brand, understands this. Its culture and its ability to capture recurring customers has led to consistent and impressive top-line growth. Additionally, merchandise is updated often, which keeps shopping experiences fresh. LULU has appreciated 37.67% over the past year. (For more, see: 3 Reasons Why Lululemon Stock Could Fall and 3 Reasons Why Lululemon Stock Could Rise.)
Lululemon is very similar to Under Armour in regards to long-term potential—it's growing new product streams including its offerings for men—but it’s slightly riskier due to a recent executive shakeup. This problem might have passed, but it’s still too early to tell. (For more, see: Why Lululemon Investors Are Ignoring Weak Guidance.)
Many people are saying, “Golf is dead.” The truth is that golf is just resting, and Callaway Golf Co. (ELY) isn’t going anywhere. It has consistently delivered top- and bottom-line growth—it turned a profit in 2014—and its debt-to-equity ratio is just 0.63. The short position is high at 12.70%, which is likely a bet against discretionary spending in the near future as opposed to a bet against the way the company is run.
Nike, Inc. (NKE) doesn’t just offer top- and bottom-line growth annually; it offers resiliency. It dwarfs the other picks above and generates $4.66 billion in operational cash flow (ttm). On top of that, the debt-to-equity ratio is just 0.10. Over the past year, the stock has appreciated 32.79% and it currently yields 1.10%. The short position is also low at 1.10%.
Nike doesn’t offer the growth potential of Under Armour and Lululemon, but it's finding new revenue streams, generating superior cash flow, and is more resilient during bear markets.
The Bottom Line
If you want to invest in sports stocks, consider looking into the companies above. Keep in mind that discretionary spending isn’t likely to increase over the next few years, which presents a bit of risk for such brands and retailers. If you’d like to invest without having to worry too much, stick with Nike. (For related reading, see: Should You Buy or Sell These Troubled Retailers?)
Dan Moskowitz does not have any positions in DKS, FL, UA, LULU, ELY or NKE.