Does Nike Belong in Your Portfolio?

With shares of Nike (NYSE:NKE) trading around $77, is NKE an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Nike is engaged in the design, development, and worldwide marketing and selling of footwear, apparel, equipment, accessories, and services. The company sells its products to retail accounts through retail stores and Internet sales, and through a mix of independent distributors and licensees around the world. Nike focuses its product offerings in seven key categories: Running, Basketball, Soccer, Men’s Training, Women’s Training, Nike Sportswear, and Action Sports. It also markets products designed for kids, as well as for other athletic and recreational uses.

Bloomberg reporter Scarlet Fu has commented on a corporate development on “Bloomberg Surveillance.” Fu said that the company has reported an increase in quarterly profits and that the results announced were slightly better than what analysts had expected. Fourth-quarter revenues from continuing operations of Nike were up 11 percent to $7.4 billion, whereas revenues from continuing operations for the fiscal year 2014 were up by 10 percent to $27.8 billion. Fu added that Nike has seen strong sales of apparel and footwear in western Europe.

T = Technicals on the Stock Chart Are Strong

Nike stock has been surging higher in the last several years. However, the stock is currently pulling back and may need time to stabilize. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Nike is trading above its rising key averages, which signals neutral to bullish price action in the near-term.

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Nike options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Nike options

17.61%

16%

14%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of Monday, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Nike’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Nike look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

6.97%

-20%

40.48%

34.38%

Revenue Growth (Y-O-Y)

10.87%

12.69%

7.99%

4.53%

Earnings Reaction

1.06%

-5.12%

-1.17%

4.69%

Nike has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Nike’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Nike stock done relative to its peers – Under Armour (NYSE:UA), Crocs (NASDAQ:CROX), and Deckers Outdoor (NASDAQ:DECK) — and sector?

Nike

Under Armour

Crocs

Deckers Outdoor

Sector

Year-to-Date Return

-1.42%

37.57%

-5.65%

2.39%

-2.17%

Nike has been an average performer, year-to-date.

Conclusion

Nike provides athletes and beginners alike with athletic and fitness footwear, apparel, and related products. The company has reported an increase in quarterly profits, and the results announced were slightly better than what analysts had expected. The stock has been flying higher in recent years but is currently pulling back. Over the last four quarters, earnings and revenues have been rising, which has left investors pleased. Relative to its peers and sector, Nike has been an average year-to-date performer. Look for Nike to continue to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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