Nike's Stock Seen Ready For a 10% Pullback

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Nike Inc. (NKR) shares have been on a tear since mid-October, rising by over 30 percent, compared to the S&P 500 which has increased by only 8 percent. But the sprint higher is showing signs of fatigue, as an analysis of the stock trading patterns and current valuation suggest that Nike is poised to fall by about 11 percent. 

The stock has been running higher in recent months as investors believe Nike's revenue may be set to improve over the coming quarters. Some see North American sales growth re-emerging, while the upcoming World Cup in June may serve as another catalyst. Both could drive top-line growth while improving margins could help deliver earnings growth. 

NKE data by YCharts

A Drop of 11 Percent

Despite the bullish sentiment, Nike has stalled out on three occasions around $68 on the technical chart. Additionally, the relative strength index (RSI) has been trending lower since peaking in late 2017 around 85; a reading over 70 is considered overbought. That could be viewed as a bearish indicator with the stock unable to garner any upward momentum.

Additionally, trading volume has been falling in recent weeks, in a sign that perhaps the bullish enthusiasm may be fading. Should the stock fall below $65.50 – a critical technical support level – shares could drop to $59, a decline of about 11 percent from its current price around $66.30.

Expensive Stock

Earnings are expected to fall by about 8 percent in fiscal 2018 to $2.31 per share, and grow by roughly 16 percent in 2018. The earnings inconsistency doesn't come cheap, with the stock currently trading at approximately 24.7 times 2019 estimates of $2.68 per share. When adjusting that earnings multiple for growth, one gets a high one-year forward PEG ratio of roughly 1.53.  

Even when comparing Nike to its consumer discretionary peers, Nike is among the most expensive in the group. The top 25 holdings in the iShares Consumer Discretionary ETF (XLY) have a median one-year forward P/E of 16.3, and an average of 22.91. That makes Nike the fourth most expensive stock in the group, behind only Amazon.com Inc. (AMZN), Netflix Inc. (NFLX), and Charter Communications Inc. (CHTR). 

Where Is The Revenue Growth?

Despite the optimism around revenue growth, the street has been very slow to upgrade its revenue estimates. Since the start of the stock surge on October 12, revenue estimates for the current year have only increased by 0.14 percent, while next year's revenue estimates have only increased by 0.34 percent.

Add to that revenue is only expected to grow by roughly 4.25 percent to $35.82 billion in fiscal 2018, and about 7 percent in fiscal 2019. (See also: Inside Billionaire Bill Ackman's $365 Million Nike Investment.)

NKE Revenue Estimates for Current Fiscal Year data by YCharts

Nike's sprint higher in recent months may soon fall flat unless the company delivers robust results and show it can do even better. That's not an easy task. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.