Warren Buffett has a long history of investing in top consumer brands. Berkshire Hathaway has several, including See’s Candies, Dairy Queen and Fruit of the Loom. Additionally, two of Berkshire Hathaway’s top stocks are Coca Cola and Apple.
If ever Buffett bought Nike (NYSE: NKE) stock, that would certainly fit the pattern of the types of businesses he has invested in before. Here are three reasons Buffett would love Nike.
1. A simple and marketable product
Buffett often taught the importance of only investing in businesses you understand. Everyone can relate to sneakers. Nike has been making performance footwear since 1972, and it’s a safe bet that it will continue to dominate the footwear market for a long time to come.
When Buffett invested $1 billion in Coca Cola stock in the late 1980s, he credited management’s use of great marketing and financial skills to grow the product worldwide. Nike shares a similar success story.
The signing of major sports stars like Michael Jordan has made Nike a household name. Most of the top teams in this year’s NCAA basketball tournament are branded Jordan or Nike. Getting its sportswear on national television in front of large audiences is a big reason why Nike has built one of the most iconic brands in the world.
2. A wide competitive gap
If a company has been doing the same thing for nearly 50 years while delivering heirloom returns to shareholders, that’s a sign the company has a sustainable competitive advantage — another key characteristic Buffett looks for.
The sportswear market is very competitive. Consider that Nike’s $38 billion in revenue last year is just over 10% of the more than $300 billion spent annually on activewear, according to Morgan Stanley. Obviously, many sportswear buyers are still not Nike customers.
Still, the company has some serious advantages over its competitors. Nike holds patents on cushioning technology, manufacturing techniques and even product design. The creativity that produces these colorful sneakers in a range of styles has inspired other companies to up their game, but they lack the swoosh logo.
One of the reasons Buffett invested in Apple stocks was the iPhone’s huge appeal to people. Buffett would also appreciate the appeal that Nike has for the consumer. Sneakerheads check Nike’s SNKRS app every day for the latest news on upcoming releases. Since the pandemic hit the United States in March 2020, Nike has added 70 million new members to its digital ecosystem.
Buffett’s investment record reveals that he likes investing in companies, not big CEOs. He often quoted the famous investor Peter Lynch, who liked to invest in companies so good that any “idiot” could run them, because sooner or later an idiot would probably run them. The point is, you want to invest in a business that doesn’t depend on brilliant entrepreneurship but can thrive on its own merits.
Three CEOs have led Nike since co-founder Phil Knight left office in 2004. No matter who ran the company, it continued to deliver above-market returns to shareholders. This is the sign of a great company.
And Nike has always had much better returns on investment than its competitors. Adidasas well as other leading consumer discretionary brands.
Over the past three years, Nike has also implemented its Consumer Direct Offense strategy to double the speed to market of new products and increase e-commerce sales. These efforts are paying off.
Nike was able to maintain positive sales growth in the nine months to February as new sneaker styles continue to hit the market at a blistering pace to capitalize on growing demand. In the last quarter, digital sales were up 59% year-over-year, which helped push total revenue up 3%.
These are strong results given the challenging environment for retail during the pandemic, and they speak to the phenomenal strength of the Nike brand in the market.
The one thing Buffett might not like about Nike shares is the valuation. The shares are currently trading at a high forward price-to-earnings ratio of 42, which is well above the levels that Buffett typically pays for a stock. Going back to the examples of Coca-Cola and Apple, both stocks were trading below 20 times earnings when Buffett made these investments.
Nonetheless, I think Nike has all the qualities that Buffett would want to see in a company worth owning for the long term.
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.