2 Reasons To Avoid Nike

With new cases of the coronavirus spiking in the US and worldwide .

With the already historic unemployment levels and job losses in recent months .

With massive uncertainty in hospitalsbanks, and other industries.

And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.

There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.

The key to continue compounding your investments and build wealth is to keep investing well over time.

Most people think the number one way to do that is to invest in assets that will grow your capital over time.

And this is huge part of things.

But another huge part of this is also losing as little capital as possible.

The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.

Both things are necessary to build wealth. But most only think of investing well.

Today I want to talk about the second part of things that few consider… Staying away from investments where you’ve got a high probability of losing money in.

In the last week I’ve shown you why to buy or avoid the following stocks…

Today, I want to show you 2 Reasons To Avoid Nike.

2 Reasons To Avoid Nike

  1. 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…

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. 

Click the links below to see the stocks we recommend helping Depression Proof Your Portfolio.

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.

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