1 More Reason To Avoid Nike
Earlier this month I showed you 2 Reasons To Avoid Nike…
Here’s a brief recap of what I said then about avoiding the stock. If you want to read the earlier Nike article in full use the link above.
Because today I’m showing you another reason to avoid its stock.
2 Reasons To Avoid Nike
- It’s Overvalued
As of this writing Nike (NKE) is a $182 billion market cap worldwide shoe and athletic apparel company.
And its massively overvalued…
- Its P/E is 73.
- Its P/CF is 74.8.
- And its forward P/E is 51.6.
On all these metrics I look to buy investments below 20 to consider them for investment.
Nike is well above these numbers on average which means its overvalued by a large amount.
And this means investing in its stock today gives you no margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning its stock in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
This lack of a margin of safety is the category Nike falls into right now.
But why is it so overvalued?
Because during this pandemic while its stores where its products are sold have closed and/or seen far lower traffic its revenue fell… Which caused its profits and cash flow to fall.
When profits and cash flow fall but the stock price doesn’t fall as much… It leads to far higher valuations. And this leads to increased risk, lower margin of safety, and lower returns you should expect to earn by owning its stock going forward.
Should Nike return to its “normal” profits and cash flow levels in time? Probably.
But I don’t recommend investments on probablys and ifs…
Especially with the extreme uncertainty we’re dealing with today.
It could be another few months or another few years we’re dealing with this “new normal.” Or we could never go back to normal as we knew it before the coronavirus ever again.
I don’t know.
What I do know is how Nike is performing now…
That is far below what it did in the past. And this leads it to being massively overvalued now due to its far lower profits and cash flows.
But there’s also something else that lowers the margin of safety for Nike that makes it riskier…
2. It’s Got A Lot Of Debt
As a percentage of its balance sheet, Nike has a lot of debt….
In most recent quarter its balance sheet is made up of 74.3% of total liabilities. And its debt to equity ratio is 1.53.
I want to invest in safe stocks that will be around for decades to come to help me build wealth over the long term. This helps insure I lose as little money as possible over time.
Typically, this means I invest in companies that have little to no debt compared to their cash and equity… And usually this means I want to invest in stocks that have a debt to equity ratio below 1.
If you’ve seen some of our previous articles, I’ve shown you stocks that have debt to equity ratios and liabilities as a percentage of their balance sheets that are far higher than Nike’s.
Here are a few recent examples of those…
- 2 Reasons To Avoid Lowes
- 1 More Reason To Avoid Cruise Ships
- 5 Reasons To Avoid Hilton
- 1 More Reason To Avoid Cheniere Energy
Yes, if you look at any of those articles the stocks all have much higher debt ratios than Nike does… But a company doesn’t have to have horrific debt numbers to make me uncomfortable investing in something.
Nike’s debt levels are too high for my liking… Even though they aren’t horrific.
Especially with the mass uncertainty we’re dealing with today…
I want the investments I recommend to you to be as safe as possible. And this means being even more careful about debt levels and risk.
None of this means I think Nike will crash and burn…
Because I don’t think that will happen.
I think it will continue performing well during and after this pandemic.
But due to the reasons above there is little to no margin of safety investing in its stock now.
This makes the investment riskier… And it also means we should expect to earn lower investment returns in its stock going forward.
And I think there are better and safer stocks out there for you to buy that will offer you these things.
Because of this I recommend you stay away from Nike stock… Even though I expect it to continue doing well during this Pandemic.
This thesis to avoid Nike – even though I expect it to perform well during this pandemic – continued playing out on September 22nd, 2020 when Nike released its most up to date quarterly earnings.
- Revenues fell 1% in the year to year quarterly period to $10.6 billion.
- Digital sales were up 82% in the year to year quarterly period due to more people buying stuff online during this pandemic.
- And earnings per share rose 10% in the quarter to quarter period to $0.95 per share.
Nike produced fantastic results in this horrible economy… And as mentioned in the earlier article these impressive results should continue.
But nothing in this quarterly update solved the 2 key issues I raised earlier this month when I told you to avoid its stock.
- Debt load
As of this writing Nike’s P/E is 75.2.
Its P/CF is 81.4.
And its forward P/E is 51.3.
Nike is even more overvalued now than it was when I told you to avoid its stock earlier this month.
And its still got a ton of debt too.
These both increase the risk of owning Nike shares by lowering margin of safety. And this means you should expect to earn lower returns owning its shares if you buy today.
Again, I don’t think Nike will blow up… I expect it to continue performing well.
But for these 2 reasons continuing, I recommend you avoid investing in its stock for the time being.
Even now that its shares are rising after its impressive quarterly results.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.