Name That Trade – $NKE Outlet

by CC August 26, 2015 11:43 am • Commentary

Unlike most stocks with significant Chinese exposure, NKE has held up remarkably well in this but of volatility. NKE saw significant selling on Monday morning but is back to 105, almost directly between the stocks 200 day and 50 day moving averages.

Part of the strength in NKE stems from the fact that the July earnings report showed no ill effects from Chinese economic weakness for the consumer apparel giant.  Even as industrial multinationals have struggled mightily in China, consumer demand for brand names like Nike have remained strong.  In fact, year-over-year revenue growth from Greater China in the most recent quarter was 18%, outpacing Western Europe at 15% and North America at 12%.  China or no China, those growth figures would be standouts at most other U.S. multinationals.

It’s those types of growth figures, even in the midst of weak demand throughout a large economy like China, that has resulted in NKE’s significant stock appreciation in the past few years.  However, like many of the other special story darlings of the recent past, NKE’s valuation is extremely expensive, at 29x trailing 12 month EPS.  That expensive valuation has not been a concern for investors until very recently.  Dan discussed the appeal of stocks like NKE in a MorningWord post in late June:

If you are looking at the recent new all time highs in Disney (DIS), Facebook (FB), Nike (NKE), Starbucks (SBUX) and of course Apple’s (AAPL) 15.5% year to date gains to glean the health of the U.S. economy (and most importantly the U.S. consumer) and surmise that U.S. stocks are in a good spot then you may be focused on the wrong group. Last Fall I dubbed this a portfolio of U.S. Consumer Teflong™ stocks and suggested that this group would likely be the last battle fought of this epic nearly seven year bull market.

But as is often the case, when the market backdrop changes, prices can readjust quite quickly.

NKE’s recent decline has broken the 50 day moving average, though the stock is still well above the 200 day moving average, which is now around $100:

Screen Shot 2015-08-26 at 9.16.17 AM
1 yr NKE chart from LiveVol Pro

Given the recent strong earnings report and improved guidance, the $100 level is likely to act as support for the time being, barring a similar panic like we saw Monday. However, the recent aggressive selling is likely a sign of a crowded position in a stock that has limited support from long-term investors who consider the expensive valuation a good reason to stay away.

NKE is probably set up for distribution in the coming months given the number of trapped longs, the recent exit of momentum investors, and the rich valuation overall.  Even though the company’s recent business trends have been rosy, maintaining a $100 billion market cap valuation and a 30 P/E is a tall order when earnings and sales growth is only 10-20% and investors are concerned about longer-term issues in the global and financial markets.  The stock does not offer a good entry point here for a pure long or short trade, but the 105/97.5/90 put fly out to October might be a good trade to play for a breakdown below the 200 day moving average. This takes advantage of elevated vol but the price action over the next few months after the recent sharp decline could mean volatility stays high for now. We’ll keep an eye on the stock for possible entries.