(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Nike Inc. (NKE)'s recent report that quarterly earnings and revenue beat analyst estimates gave many Nike bulls hope that the stock could thrive despite the recent upheaval in the stock market. But Nike's shares have fallen nearly 6 percent off their annual high last month even with the good earnings news. Unfortunately for Nike's hard-core bulls, that may be just the beginning of more sharp declines to come, as steep as 24 percent, based both on technical analysis and bets by options traders.
In short, the outlook for Nike's stock is dramatically more bearish than what we outlined only a few weeks ago. (See also: Nike's Stock Seen Ready For A 10% Pullback.)
The technical chart today suggests that the stock is poised for a short-term correction, while the options market is implying a drop of almost 24 percent. The bearish outlook comes despite analysts raising their price target by nearly 4.5 percent since March 16 to $71.11 according to data from Ycharts.
Weak Technical Chart
The technical chart for Nike shows a stock that appears to be rolling over while trading below resistance at around $65.50. Additionally, the relative strength index (RSI) is trending lower and has been in place since December of 2017. This increases the odds that the stock will correct, falling by about 10 percent.
Nike options traders are betting the stock falls even further, with nearly 21,000 of open put contracts at the $50 strike price for expiration on January 18, 2019, and 14,000 put contracts open at the $52.5 strike price. With the $52.5 strike price contracts trading at approximately $1.75, it means the stock needs to fall by nearly 23 percent to $50.75 just to break even. It is a reasonably sizable bet, about $2.5 million, for options almost ten months from expiration.
Nike's latest results came in ahead of analyst estimates. Earnings were nearly 29 percent higher, at $0.68, while revenue beat estimates by only 1.5 percent at $8.984 billion. But those numbers prove just how starved Nike is for growth, and how far those earnings estimates have fallen. Nike's earnings per share showed no growth.
The outlook for Nike going forward doesn't improve much either, with analysts looking for annual earnings to decline by 6.3 percent to $2.35. Meanwhile, what makes that earnings drop look worse is that revenue is expected to climb by over 4.8 percent to $36.01 billion. For those declining earnings, one gets to pay nearly 28 times fiscal 2018 estimates.
Should headlines of a trade war continue to escalate with China, Nike's share decline could accelerate. The company in its latest quarter generated nearly 15.7 percent of its revenue from China and was the biggest driver of revenue growth.
That means Nike and its stock bulls could get badly burned.
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.