Shares of the footwear and athletic apparel giant Nike (-0.25%) rose by 11.3% in August, as reported by S&P Global Market Intelligence. Throughout most of the month, Nike’s stock mirrored the fluctuations of the S&P 500, until it diverged following the announcement that Pershing Square had acquired a stake in the company.
Pershing Square, the hedge fund managed by billionaire Bill Ackman, is known for its value-driven investment approach. Ackman’s reputation adds weight to his investment decisions, signaling to investors that a company might be undervalued when he takes a position in it.
On August 14, documents from Pershing Square revealed a $229 million investment in Nike shares. Although this represents the smallest stake within its portfolio, it’s significant given that Ackman’s fund is invested in only eight companies, making each position consequential regardless of its size.
Is Nike stock truly a bargain?
Currently, Nike’s stock is valued at around 22 times its earnings. Before the Pershing Square news, it was trading at less than 20 times earnings—a level not seen since 2012, indicating a rare dip in valuation.
NKE PE Ratio data by YCharts.
Of course, value investing encompasses more than just price-earnings ratios. While Nike stock hasn’t appeared this affordable in over a decade, its low price tag must translate into shareholder value to be truly meaningful.
In the past year, Nike has generated over $51 billion in revenue, underscoring its status as a significant global player. It remains profitable, implying that it isn’t eroding shareholder value. Hence, it presents a compelling value-stock proposition. However, growth is sluggish, and challenges persist. For Ackman’s investment to be rewarding in the long run, Nike must address certain business issues.
What’s happening with Nike?
In its latest quarter, Nike experienced a slight decline in sales. Management cautions that investors should temper expectations for the upcoming year, describing it as a period of “transition.” The company aims to invigorate consumers with refreshed inventory to stimulate sales growth. Until then, profits might face pressure.
While Nike’s stock is cheaper relative to its historical trading levels, it isn’t necessarily cheap in absolute terms—there are numerous value stocks with lower valuations. Given this, I’d hesitate to purchase Nike stock without greater confidence in its turnaround strategy.
Nike is set to report its financial results again on October 1, which will offer investors more insight into recent business trends as management implements changes. If the trends are positive, I would be more inclined to invest alongside Ackman in Nike stock.
