3 Reasons to Sell NKE and 1 Stock to Buy Instead

Although Nike (currently trading at $69.05 per share) has gained 29.6% over the last six months, it has trailed the S&P 500’s 34.7% return during that period. This may have investors wondering how to approach the situation.

Is now the time to buy Nike, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.

Why Do We Think Nike Will Underperform?

We don't have much confidence in Nike. Here are three reasons we avoid NKE and a stock we'd rather own.

1. Declining Constant Currency Revenue, Demand Takes a Hit

We can better understand Footwear companies by analyzing their constant currency revenue. This metric excludes currency movements, which are outside of Nike’s control and are not indicative of underlying demand.

Over the last two years, Nike’s constant currency revenue averaged 4.8% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Nike might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Cash Flow Margin Set to Decline

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Over the next year, analysts predict Nike’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 6.5% for the last 12 months will decrease to 1.7%.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Nike’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Nike doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 36.7× forward P/E (or $69.05 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward an all-weather company that owns household favorite Taco Bell.

Stocks We Would Buy Instead of Nike

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