To be completely fair, investors don’t need additional reasons to be skeptical about a consumer discretionary play, even one as storied as Nike (NYSE:NKE). At the very least, the economy faces an ambiguous backdrop. Nevertheless, with an insider buying a significant amount of shares of the sports apparel giant, this idea could get interesting. I am cautiously bullish on NKE stock.
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Insider Trading May Help Lift Sentiment for NKE Stock
At first glance, the bullish narrative for NKE stock runs into major fundamental challenges. Predominantly, policymakers at the Federal Reserve warned not too long ago that inflation remains too high. Therefore, the central bank may need to raise interest rates, posing significant anxieties about a possible recession. Nevertheless, a key insider buying NKE offers a nice confidence boost.
According to TipRanks’ Insider Trading Activity screener, Nike Director Robert Holmes Swan, through an auto-buy transaction, acquired 13,072 shares last week. In total, the acquisition amounted to almost $1.3 million, a value significantly higher than many recent transactions. Notably, Swan served as former Intel (NASDAQ:INTC) CEO, thus being no stranger to the business world.
Moreover, the insider Buy is fundamentally significant for what it symbolizes. Unlike insider Sells, which may materialize for a host of reasons – including utterly mundane ones such as tax considerations – people generally acquire shares of their own company for one reason: they believe the value will rise higher.
Just as importantly, the vote of confidence for NKE stock occurs at a time when the consumer discretionary space faces real pressure. For instance, it’s true that the September jobs report came in much hotter than expected. On a surface level, such a framework seems incredibly positive. However, it also translates to more dollars chasing after fewer goods, which is inflationary.
Given the enormous challenges that everyday households already suffer, it would be all too easy for consumers to shop for generic apparel and footwear. Swan should recognize this dynamic. So, the fact that a hefty insider buy materialized is a strong vote of confidence for NKE stock.
Financials Point to a More Encouraging Future
Notably, since the beginning of this year, NKE stock has fallen by more than 17%. Obviously, that’s not a great message to send to investors. However, it’s important to focus on the financials. As TipRanks reporter Vince Condarcuri stated, Nike recently posted earnings per share of 94 cents, beating analysts’ consensus target of 76 cents per share. Sales also increased by 2% on a year-over-year basis to $12.94 billion, although this tally missed the consensus estimate by $60 million.
Still, given the tough environment of the consumer retail marketplace, the disclosure represented a win for NKE stock. Drilling into some of the details, those who believe in Nike have justification for their optimism. Specifically, its gross profit landed at $5.72 billion, translating to a gross margin of 44.2%. Mostly, that’s in line with the year-ago quarter’s print of 44.3%.
At its peak during the post-pandemic years, its gross margin hit nearly 46% during Fiscal Year 2022. Therefore, Nike still commands incredible brand power. Yes, it has traded profitability in exchange for higher sales in prior quarters. Still, it’s not occurring at such a rate that it’s causing alarm in the financials.
Addressing a Major Distraction
While the sports apparel stalwart has put on a relatively impressive performance on its income statement, some observers may question the valuation of NKE stock. Trading at a trailing earnings multiple of around 30x, that’s not exactly a good deal on paper. After all, the average multiple for the apparel retail sector sits at 13.49x. For the apparel manufacturing space, it’s still low at 15.27x.
Nevertheless, it’s probably wildly difficult to find a company with resilient brand power and an undervalued earnings multiple. It may not be impossible but for a company like Nike, investors usually must pick one or the other. Ahead of a possible slowdown in the economy, pricing power may trump “paper” value.
After all, during a slowdown, many ideas may appear undervalued. With NKE stock, the underlying catalyst stems from people wanting the products no matter the cost.
Is NKE Stock a Buy, According to Analysts?
Turning to Wall Street, NKE stock has a Moderate Buy consensus rating based on 17 Buys, nine Holds, and one Sell rating. The average NKE stock price target is $119.48, implying 23.3% upside potential.
The Takeaway: A Risky Move Possibly Signals a Recovery
With an insider buying shares of NKE stock, this might be the catalyst longsuffering investors have been waiting for. It’s not just about the size of the acquisition but rather that it’s occurring in a contested environment in retail. That speaks to strong conviction. Better yet, it’s not an unjustified conviction either.
