Why Nike's Hot Stock May Fall By 10%

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

Nike Inc.'s (NKE) stock has soared by about 27% in 2018 as investors focus on strong brand growth in North America. However, the shares of the athletic apparel maker may be due to drop by about 10% from its current price of $79.40 over the coming weeks. 

The company reported stronger-than-expected fiscal-fourth-quarter 2018 results at the end of June. Earnings beat estimates by nearly 8% while revenue was more than 4% better. Should shares pull back, it is likely not to be on a long-term basis, as analysts see improving earnings and revenue growth for the next three years.  

NKE data by YCharts

Weak Technical Chart

The technical chart is showing a bearish technical reversal pattern known as a rising wedge. The pattern suggests the stock is due to reverse its current uptrend and fall. Additionally, there was a technical gap created when the company reported the better-than-expected results at the end of June. The two bearish indicators suggest the stock may fall to roughly $72 from its current price. 

The relative strength index (RSI) is suggesting shares may be overbought, reaching 70 now on two occasions. Another negative indication, the RSI has been moving sideways, despite the stock’s price continuing to rise, a potentially bearish divergence. 

Strong Growth

Despite the negative technical charts, the fundamentals for the business continue to look strong. Analysts have been raising their revenue forecast for the coming year, and now see it growing more than 8% to $39.4 billion from $38.6 billion. Revenue estimates for fiscal 2020 and 2021 have also increased and are expected to climb by about 7% in both years. 

The earnings forecast looks strong as well and is expected to accelerate in 2019 and 2020, with growth rising from roughly 11% in 2019 to 17% and 18% in 2020 and 2021 respectively.

Cheap Valuation

When comparing Nike to some other sporting apparel companies, shares are among the cheapest, trading at about 25.5 times fiscal 2020 earnings estimates. That is much lower than Under Armour Inc.'s (UAA) forward earnings multiple of nearly 65 and Lululemon Athletica Inc.(LULU) at roughly 33. 

NKE P/E Ratio (Forward 1y) data by YCharts

While the technical chart is suggesting a Nike share pullback, it may not take long for the stock to rebound given a healthy growth outlook for the company. Meanwhile, with the next round of quarterly earnings not expected to be released until the end of September, a cooling off period for the stock may not be so bad.

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.

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