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Inflation Shouldn’t Stop You from Considering Nike Stock
Stock Analysis & Ideas

Inflation Shouldn’t Stop You from Considering Nike Stock

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Elevated CPI prints might discourage some traders from holding Nike stock because shoppers are squeezed for cash. Yet, the steep discount in Nike stock appears to be a value investor’s dream, and an upcoming earnings event could propel the share price higher.

Headquartered in Oregon, Nike (NKE) manufactures and sells athletic footwear and other sports-related apparel. I am bullish on the stock.

Generations of sports fans have pointed to a famous brand name that excels in the athletic sneaker market: Nike. Actually, you don’t have to be a sports fan to recognize the Nike logo or the legions of celebrities who have endorsed the company’s shoes and other products.

On the other hand, not everyone in the investing community is convinced that Nike is a company to stake your capital on now. Nike is a perfect example of a cyclical business, meaning that it does well when the economy is good and people have more money to spend. Lately, cyclical companies have been under pressure due to challenging macroeconomic conditions.

Nike’s sneakers might be fashionable, but they’re not known for being particularly cheap. Moreover, Nike stock has fallen under pressure in 2022 and this reflects investors’ reluctance to wager on a manufacturer of pricey products. Still, there are reasons to lean bullish on Nike as the year wraps up its second quarter.

A Comfortable Investment

After three consecutive months of U.S. Consumer Price Index (CPI) annualized growth readings above 8%, there’s no denying that inflation is a persistent problem in America. On Main Street, consumers are feeling the pinch as they try to stretch their dollars just to make ends meet. Meanwhile, Wall Street has punished cyclical stocks in multiple subsectors.

Among those subsectors is athletic wear, and we can see the damage that’s been done to Nike stock. Shares traded at $179.10 at their 52-week peak, but lately, they’ve struggled to stay above the crucial $100 mark. Wherever you look, you might find discouraging news to make you feel nervous about buying the dip in Nike stock.

For example, Nike announced that in July, the company will discontinue its popular Nike Run Club app in China. No reason was provided for the discontinuation, but Nike did state that it plans to provide runners in China with an “enhanced and localised solution in the future.”

There’s no need to worry too much about Nike’s Chinese business, though, as a company spokesperson assured that Nike is “creating an ecosystem from China for China, specifically catered to the region’s unique consumer needs to serve athletes better.”

To help investors stay calm, they should bear in mind that Nike has withstood economic slowdowns in the past. It’s a surprisingly resilient company in good and bad times. Perhaps that’s why Nike stock has a five-year monthly beta of 0.96, which means that Nike stock has moved very similarly to the S&P 500 (SPX), so it’s not super volatile.

On TipRanks, NKE scores a 9 out of 10 on the Smart Score spectrum. This indicates a high potential for the stock to outperform the broader market.

Big Event Coming

Another sign that Nike’s business is stable despite the impact of inflation is that the company continues to pay a dividend. Currently, Nike’s forward annual dividend yield is 1.14%, which should appeal to income-focused investors. Also, it’s worth noting that Nike’s board of directors recently approved a quarterly cash dividend of $0.305 per share.

If you’re already invested in Nike stock, or even if you’re just thinking about it, it’s a good idea to mark this date and time on your calendar: June 27, 2022, at approximately 1:15 p.m. Pacific Time. That’s when Nike plans to release its fourth-quarter Fiscal 2022 financial results.

Most likely, Nike won’t knock it out of the park in its upcoming fiscal report. However, the company’s results don’t have to be perfect. The important thing is for Nike to demonstrate at least moderate growth and resilience amid challenging economic conditions.

In the company’s previous fiscal report, Nike exhibited 5% year-over-year revenue growth. Moreover, Nike’s gross margin increased by 100 basis points to 46.6%. Nike President and CEO, John Donahoe, cited his company’s “consumer connections, compelling product innovation, and an expanding
digital advantage,” and assured at the time that Nike has “the right playbook to navigate volatility.”

Could Donahue have possibly known, back in March, that volatility in the markets and economy would ramp up during the summer? It’s as if he somehow saw what was coming, and wanted to prepare investors for turbulent financial conditions: Russia’s prolonged invasion of Ukraine, persistently high inflation, aggressive Federal Reserve interest-rate hikes, and so on.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, NKE is a Moderate Buy, based on 17 Buy and five Hold ratings. The average Nike price target is $154.14, implying 43.58% upside potential.

The Takeaway

The upcoming financial report will give Nike a chance to prove that it can grow even if there are macroeconomic headwinds. Investors, both current and prospective, should be realistic in their expectations. Nike won’t likely post across-the-board beats in its quarterly data release. As long as the results indicate moderate sales growth and decent margins, that’s a win for the company and its stakeholders.

At the same time, value investors should observe that Nike stock is trading far below its 52-week high, yet it’s still not excessively volatile. Thus, Nike stock is likely the type of asset you can hold overnight without losing sleep. So, feel free to put on a comfortable pair of sneakers and consider running to your broker while Nike stock still trades at a deep discount.

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