Nike Stock Could Jump in the First Half of 2022

0
  • Nike had a volatile year and stocks are down 11.8% year-to-date
  • The valuation is high
  • Wall Street consensus is bullish, with around 25% gain expected over 12 months
  • The market’s implied outlook for NKE is slightly bullish through mid-2022, but slightly bearish for the full year

I remember reading a long time ago that Nike (NYSE:) is best described as a marketing company that sells shoes rather than a shoe company. The company has created a host of internationally acclaimed products and marketing campaigns for many years.

At the end of 2021, NKE moved away from the physical activity of producing footwear and clothing in purchase RTFTKa company that designs and sells virtual sneakers for the metaverse as well as the production of shoe-related NFTs.

Nike’s stock price has moved significantly over the past 12 months, from $140 at the start of 2021 to a 12-month low of $127.1 in April and then to a close of $173.85 on the 5th. august. The high close for 2021 was $177.51 on November 5.

The precipitous share price gains began in June after Nike reported a very strong Q4 on June 14. Q4 EPS was 82.7% above analysts’ expectations (Source: E-Trade).

By mid-September, shares had fallen significantly from their year-to-date highs, but NKE then recorded another (albeit small) profit beat for the fiscal first quarter on September 23, which pushed the price to a 2021 high at the close. The shares have fell 11.8% so far this year.

Source: Investing.com

Nike is obviously very sensitive to emerging news and, with the high valuation of 39x equities are also likely to be exposed to interest rates.

When I analyzed Nike on March 3, 2021, the analyst consensus outlook was bullish and the 12-month consensus price target was around $163, 19% above the stock price at that time. NKE’s valuation got me thinking, with a much higher P/E than the big tech companies.

In addition to fundamentals and analyst consensus, I considered the options market consensus outlook, implied market outlook. Option prices on a stock reflect the market’s consensus estimate of the probabilities that the stock’s price will rise above (call option) or fall below (put option) a specific level (the strike price of the option) by the expiration of the option. By analyzing call and put option prices at a range of strike prices, all with the same expiration date, it is possible to calculate a probabilistic price prediction that reconciles option prices. This is the implied market outlook.

Last March, the implied market outlook for NKE through January 21, 2022 (calculated using options expiring on that date) was slightly bearish, with fairly high volatility. With the high valuation, bullish outlook on Wall Street and implied bearish market outlook, I have compromised on an overall neutral rating for NKE. Since the publication of this article, NKE has increased by 7.7% (excluding dividends), against 18.3% for the .

In my analysis, I preferred to write covered call options on NKE to generate income. At the beginning of March, it was possible to sell a call option on NKE with a $150 strike, expiring on January 21, 2022, for $11.50 (as described in the March 3 post).

Today, this $150 call is trading at $0.72 and will likely expire worthless on January 21. An investor who bought NKE at $137.09, the stock price at the time the article was published, would have earned 8.1% in total return and an additional 7.9%. writing the covered call option (representing the present value of $0.72), for a total return of 16%. It still lags the S&P 500, but the premium from selling the call has helped a lot.

As we approach the end point of the Market Implied Outlook in my previous analysis (January 21, 2022) and with approximately 10.5 months elapsed, I have updated the Market Implied Outlook for NKE for the next year and, as before, relative to the consensus outlook of Wall Street analysts.

Consensus outlook from Wall Street analysts for NKE

E-Trade calculates the Wall Street Consensus Outlook from the views of 20 ranked analysts who have published ratings and price targets for NKE over the past 90 days. NKE’s consensus rating is bullish, as it has been since my last analysis, and the 12-month consensus price target is 27% higher than the current stock price. There is a fairly high level of agreement among these analysts, with the lowest individual price target indicating a 15% gain.

NKE Analyst Consensus Rating and 12-Month Price Target

Source: E-Commerce

invest.comThe Wall Street consensus version of the outlook is calculated by aggregating the views of 35 analysts. The consensus rating is bullish and the 12-month consensus price target is 22.5% above the current stock price, slightly below the E-Trade consensus value.

NKE Analyst Consensus Rating and 12-Month Price Target

Source: Investing.com

e-commerce and invest.com the calculations for the Wall Street consensus are bullish and both have 12-month consensus price targets above 22%, with an average of 24.7%.

Implied market outlook for Nike

I generated implied market outlooks for the next 1.9 months (using options expiring March 18, 2022), the next 4.9 months (using options expiring June 17, 2022) and for next 12.1 months (using options that expire on January 20, 2023) to provide a short-term outlook as well as out to 2022. Options that expire in March, June and January also tend to be very liquid, which which builds confidence in the relevance of the market’s implied outlook.

The standard presentation of the implied market outlook is as a probability distribution of price return, with probability on the vertical axis and return on the horizontal.

NKE Market Implied Price Return Probabilities by March 18, 2022

Source: Author’s calculations based on E-Trade option quotes

The market’s implied outlook through March 18 is very symmetrical, although the peak probability is very slightly tilted to favor negative returns. The annualized volatility calculated from this distribution is 32.4%, which is moderate for a large cap stock.

To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative return side of the distribution around the vertical axis (see chart below).

NKE Market Implied Price Return Probabilities by March 18, 2022

Source: Author’s calculations based on E-Trade option quotes. The negative feedback side of the distribution has been rotated around the vertical axis.

This view shows that the implied market outlook is almost perfectly symmetrical, with equal probabilities of positive and negative returns of the same magnitude (the red dotted line and the solid blue line are almost superimposed).

The theory suggests that the market’s implied outlook should have a negative bias because risk-averse investors tend to overpay for downside protection (put options). The equity risk premium exists (theoretically) because investors demand to be compensated for bearing risk (they are risk averse), so the assumption of a negative bias in the implied market outlook is reasonable . With this in mind, an implied neutral market outlook (matching probabilities as we see here) should be interpreted as (at least) slightly bullish.

Looking to the middle of 2022, using options that expire on June 17, 2022, the implied market outlook is similar and is also interpreted to be slightly bullish. The annualized volatility calculated according to this outlook is 31.8%.

NKE Market Implied Price Return Probabilities by June 17, 2022

Source: Author’s calculations based on E-Trade option quotes. The negative feedback side of the distribution has been rotated around the vertical axis.

The market’s implied outlook for next year (calculated using options that expire on January 20, 2023) is shifting to increasingly favor negative price returns (the red dotted line is above the line solid blue on the left half of the graph). I interpret this outlook as slightly bearish. The annualized volatility calculated from this outlook is 31.8%.

NKE Market Implied Price Return Probabilities by January 20, 2023

Source: Author’s calculations based on E-Trade option quotes. The negative return side of the distribution has been rotated around the vertical axis.

The market’s implied outlook for NKE is slightly bullish through mid-2022, but slightly bearish for the next 12 months. Expected volatility is stable throughout the year, at around 32%. My previous analysis provided an (almost) 11 month outlook for NKE which is qualitatively similar to the new 12.1 month outlook, although the current outlook has less of a bearish slant.

Summary

In many ways Nike is in a league of its own and for this reason peer comparisons are difficult. The shares are certainly expensive, but the P/E is well below the highs of recent years.

Looking ahead, NKE is increasingly focusing on the value of its design properties rather than the utility footwear sector. The consensus rating from Wall Street analysts is bullish and the consensus 12-month price target is 25% higher than the current stock price. The implied market outlook is slightly bullish through mid-2022, but slightly bearish for the full year. The expected volatility is around 32%.

Typically, for a buy rating, I’m looking for an expected return that’s at least half the expected volatility. The expected return consensus of analysts is well above this threshold. I’m changing my rating on NKE from neutral to bullish, but I plan to revisit this analysis mid-year.

Share.

About Author

Comments are closed.