Why do so many Robinhood traders own Nike stock?

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A nifty feature available in the free Robinhood stock trading app is a top 100 stocks list that reveals the most popular stocks held by Robinhood users. The list represents a mix of all kinds of stocks spanning multiple industries. There are a handful of top consumer goods stocks on the list, including Nike (NKE 3.21% ).

A total of 102,882 Robinhood traders held shares of Nike at the time of this writing. Obviously, Nike is a household name and many investors like to buy stocks of companies they know well, which follows the tried and true wisdom of investing legend Peter Lynch.

But what makes Nike a good stock to own now?

Image source: Nike.

A story of outperformance

Nike is not only an iconic brand recognized around the world, but from a purely financial point of view, it is a very well managed company that operates in a growing industry. Between fiscal 2009 and fiscal 2019 (which ended in May), its annual revenue more than doubled to $39 billion. But that’s relatively small compared to the more than $300 billion spent annually on activewear.

More importantly, Nike’s profits grew even faster, with net income rising from $1.5 billion in fiscal 2009 to just over $4 billion in fiscal 2019. Even While COVID-19 caused Nike’s sales to slump in the last quarter, the stock is up 535%. return over the last 10 years, dividends reinvested. This is roughly double the yield of the broader market as measured by the S&P500 index.

NKE Total Return Price Table

NKE Total Return Price given by Y-Charts

Companies that have consistently increased revenue and profits over time and delivered above-market performance will generally continue to perform well in the future. High-growth stocks will continue to reach new long-term highs. Nike has a very strong consumer brand that should almost guarantee its future success. This is probably why many investors have added Nike stock to their Robinhood accounts.

Will COVID-19 halt Nike’s momentum?

Some investors might be surprised at how quickly the broader stock market has rebounded, especially given the continued short-term uncertainty for the wider economy and the recent spike in unemployment. Nike store closures caused its sales to drop 38% year-over-year in the fiscal fourth quarter ending in May.

However, investors anticipate a strong recovery on the horizon. Nike expects the next two quarters to show a decline in revenue from a year ago, but during the fiscal fourth quarter conference call on June 25, Chief Financial Officer Matt Friend said revenue is expected to ” increase significantly” in the second half of the year. 2021. A strong second half of the fiscal year is expected to bring full-year revenue flat versus fiscal 2020, which is remarkable given the sharp decline in sales in the last quarter.

In Nike’s latest quarterly earnings report, there were signs of strong underlying business. Nike’s business in Greater China, which has been its fastest-growing region, has already returned to revenue growth on a currency-neutral basis.

More impressive was Nike’s phenomenal e-commerce growth in the last quarter, which accelerated to a 79% growth rate and accounted for almost a third of total revenue. Management sees digital sales reaching half of annual revenue over time, which should fuel Nike’s earnings growth even further as digital sales generate a higher profit margin than physical store sales.

Nike running shoes shown next to a man and woman running in Nike shoes.

Image source: Nike.

Nike’s future is worth a bounty

Stock is not a value in the traditional sense. It sports a price/earnings ratio (P/E) of 40.6, based on the consensus earnings estimate for this year. That’s high when the average S&P 500 stock has a forward P/E of 31.5.

The higher valuation reflects the expectation that Nike will continue to outperform going forward. The demand for athleisure and lifestyle sneakers doesn’t seem to be stopping. Last year, the Nike Air Max 270 and the Air Force 1 Low were the two best-selling sneakers on the market. Footwear accounts for two-thirds of Nike’s annual revenue.

CEO John Donahoe also believes Nike will emerge as a stronger company on the other side of COVID-19, based on the performance of the investments it is making to support the growth of the digital business. Nike’s apps, such as SNKRS and Nike Training Club, are important pillars of Nike’s e-commerce strategy, which management calls its Consumer Direct Offense strategy.

“As we change our operating model to fuel this strategy, NIKE’s leadership position will become even stronger going forward as the sport continues to resonate with consumers, amid a global shift towards health and wellness,” Donahoe explained on the recent earnings call.

Given trends towards more active lifestyles, coupled with an iconic brand that has a proven track record of profitable growth, Nike is a top choice in consumer discretionary and with Robinhood merchants.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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