Last week Nike (NKE) reported better than expected fiscal 2020 Q1 results, per Barron’s:
Nike said it earned 86 cents a share on revenue of $10.7 billion. Analysts were looking for 71 cents a share on revenue of $10.43 billion.
Sales were up 10% for the Nike brand, excluding currency fluctuations, which the company said came from general growth in the category, along with direct and wholesale channels. North American revenue rose 4%, Europe, Middle East, and Africa climbed 12%, and Asia-Pacific and Latin America led with a 13% gain.
The company said gross margins rose 1.50 percentage points in the quarter, and it repurchased 11.9 million shares in the period. Inventories were up 12% year over year in the quarter, while fixed costs increased 9%, although that didn’t seem to bother investors much.
Shares of the stock the next day gapped to a new all-time high, above its prior two all-time highs at $90 from April and July of this year:
This is a fairly powerful technical pattern and as many readers know breakouts on large volume after long bases create what is likely to be a new trading range… past resistance becomes support. Regular readers also know I have a little saying, purely anecdotal, but when most stocks break $90 for the first time, they usually have a way of ticking $100 in the not so distance future.
NKE’s results are defying some of the narratives about global trade, as no shortage of consumer brands who rely on overseas sales for growth are struggling this year with the uncertainty of tariffs, China’s and Europe’s slowing growth and the resurgent U.S. Dollar, NKE share price is buoyant, up 26% on the year.
Earlier this year in August after first threatening a new round of tariffs on consumer goods coming into the U.S. from China, trump put off a good slug of threatened $300 billion until December 15th after the bulk of the holiday selling season. If there is no more progress in the coming months on a trade deal, and I suspect there won’t be much by way of a substantive deal that includes the reasons for the tariffs in the first place (combatting China’s practices of forced technology transfer and IP theft) than there is a good chance we see these consume tariff’s in mid December. If that were the case long holders of stock’s like NKE might look to lock in gains between now and year-end and protect below key support at $90. To do so without selling your shares, while also allowing to participate in some upside, to a point, an investor could consider a collar, a hedging strategy where they sell 1 out of the money call vs 100 shares of long stock and use the proceeds to buy 1 out of the money put of the same expiration, thus collaring their stock, with gains stopping at the short call strike, and losses stopping at the long put strike, for instance…
vs 100 shares of NKE long at $94, Buy 1 Dec 100 – 90 collar for 60 cents
-Sell to open 1 Dec 100 call at $2.10
-Buy to open 1 Dec 90 put for $2.70
Break-even on Dec expiration:
Profits of the stock up to $100 (less the 60 cents premium paid for the hedge), the stock on Dec expiration would be called away at 100 or higher, but the investor could always cover the short call to keep the long position intact.
Losses of the stock down to $90 (plus the 60 cents paid for the hedge), but protected below.
Rationale: a long holder of NKE would place a hedge like this on their stock if they wanted to lock in gains to a certain point, and importantly willing to give up upside above $100 in the next two and half months in return for protection below $90.
I would add one more point, $90 appears to be healthy near term support, and the stock seems destined to test $100, long holders might look to do this sort of trade as the stock gets into the highs $90s but also be ready to consider on a stalling on failure.