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

Nike Inc. (NKE) shares have been on a hot streak over the past year, climbing by nearly 35% versus the S&P 500's climb of only 13.4%. Even more impressive is that a good portion of that gain has come in 2018, with Nike climbing by nearly 14%, while the broader S&P 500 is up only 2%. But shares do not come cheap, trading at its most expensive valuation over the past three years, and that means the stock could be setting up for a pullback. 

Nike shares currently trade around 26 times fiscal 2019 earnings estimates of $2.70 per share. The last time shares traded at such a lofty valuation was back in the fall of 2015, which was followed by the stock falling over 25%—and a stock price that stalled out for nearly two years. 

^SPX Chart

^SPX data by YCharts<

Peak Valuation

Nike's one-year forward P/E peaked around 27 times in the fall of 2015. Leading to the high valuation, shares rose by about 76% from roughly $37.5 to $66.25. That sharp rise was followed by a 25% drop over the next year to around $49.50.  The period saw the P/E multiple for Nike rise from roughly 19 to 27.5, only to contract back to nearly 18. 

NKE Chart

NKE data by YCharts

Weak Earnings 

The earnings for the balance of fiscal 2018, forecast a decline of nearly 6%. Earnings growth is seen accelerating in fiscal 2019 and 2020 by about 14.25% and 16.2%, respectively. Not fast enough to warrant the lofty P/E multiple, when adjusted for growth, giving it a PEG ratio of about 1.86 for 2019. But even more concerning, those future earnings forecasts have been trimmed over the past year. Since June 2017, estimates for fiscal 2019 have been reduced to $2.70 from roughly $2.90 per share, a decline of about 7%. Meanwhile, forecasts for 2020 fell from $3.30 to $3.15, a drop of 4.5%. 

NKE EPS Estimates for Next Fiscal Year Chart

Technical Strong

All of this, of course, doesn't mean that Nike shares can't continue to rally over the short term, because from a technical basis, shares of Nike have broken out. The chart shows two critical indicators that suggest the stock may have further to rise over the short run. The chart presents a bullish technical pattern, a rising triangle, along with the stock rising above a significant technical resistance level around $69.50, which signaled the breakout. The relative strength index (RSI) has also been trending higher and has yet to hit overbought conditions at a level above 70. 

Nike will likely report its fiscal fourth-quarter 2018 results sometime toward the end of June, and at that time investors will find out if Nike's stock is merely too expensive or has further room to rise.  

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 holdingsInformation 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.