Athletic apparel giant Nike (NKE) received a much-needed reprieve when broader economic data finally turned positive for the enterprise. As AP reported, Americans opened their wallets, boosting their spending at retailers in July by the most in a year-and-a-half period. This surprisingly positive data point suggested that the economy may be more robust than previously assumed.
The move represented a clear picture of contrasts against what occurred earlier this month, when the CBOE Volatility Index – also known as the VIX or the fear indicator – shot up to multi-year highs. Unfortunately, the sudden shift toward bearish sentiment caught many traders off guard, resulting in a severe selloff. However, the pain in NKE started a month earlier.
As Barchart contributor MarketBeat mentioned, NKE stock stumbled badly following a mixed earnings result for the fiscal fourth quarter. Although the company’s earnings per share came in at $1.01 – thus beating the expected target of 85 cents – the athletic apparel brand generated revenue of $12.6 billion. This figure missed the projected $12.9 billion that analysts had called for.
The dichotomy between the earnings beat and revenue miss centered in part on Nike’s North American sales. Heightened competition hurt Nike in the core performance running shoe category. In addition, the company’s direct sales channel suffered a decline in demand, indicating rising consumer pressures.
Not surprisingly given the negative investor response to NKE stock, Barchart’s Technical Opinion indicator rates the equity as a 64% Sell. In addition, while the consensus view of Nike stands as a Moderate Buy, the assessment is varied, with two experts warning that the company is a Strong Sell.
Despite the less-than-encouraging signals, NKE stock recently pinged as a J-Hook.
J-Hook for NKE Stock Warrants Closer Investigation
While Barchart offers a range of screeners – from the Death Cross to RSI Overbought/Oversold indicators to Strong Volume measurements – my favorite tool has got to be the J-Hook or J-Pattern. This chart formation describes a sinusoidal action as an initial boost of bullishness is met by a downwardly corrective force. However, the sinusoidal pattern emerges again but this time, the target equity continues moving higher.
The beauty of the J-Hook is that unlike other patterns, equities that meet the designation must undergo a long series of qualifying tests. Fail one component and the resulting chart formation does not count as a J-Hook. That’s a much different proposition than many other screeners. For example, a Death Cross merely involves the 50-day moving average slipping beneath the 200 DMA.
It’s a single event and only requires one qualifying element: is the 50 DMA lower than the 200 DMA or not? With the J-Hook, a stock must meet nine criteria before it earns the label.
Fundamentally, the higher qualification standards of the J-Hook means that there are few legitimate examples. But of those that make the cut, the chances that a false signal was involved are minimal. It’s not zero, of course, but the implications of the pattern are more credible than other technical deductions.
Moving forward, the J-Hook signal for NKE stock materializing is encouraging because the equity really needs to fill the gap. Prior to Thursday’s big move, Nike shares were trading at no-man’s-land. At yesterday’s closing price of $82.50, the per-share rate is awfully close to a support line that emerged in late 2022.
If NKE stock can establish a baseline around the $85 level, it probably won’t be long before it takes a shot at the $90 line. From there, a push to the psychologically critical $100 milestone would appear to be the next logical bet.
Financials Support a Higher Valuation of Nike Stock
It’s not just technical musings that bolster the case for Nike stock – the idea that shares could rise higher also makes sense from a financial perspective.
To be fair, the price-to-sales ratio of the footwear and accessories industry sits at 1.05X. However, NKE stock runs a sales multiple of 2.46X. However, in the trailing 12 months (TTM), the market accepted a multiple of 3.11X. What’s more, during the three months ended Nov. 30, 2023, the multiple stood at 3.34X.
Stated differently, Nike stock has the potential to rise to its former valuation. If so, the equity could be a discount.
True, analysts are looking for Nike in the current fiscal year to generate revenue of $48.91 billion. That’s down 4.8% from last year’s print of $51.36 billion. However, with U.S. retail sales coming in hotter than expected, it wouldn’t be the most absurd thing for NKE to deliver a sales surprise.
What’s more, patient investors may look forward to the next fiscal year. That’s when analysts project consensus sales to reach $51.27 billion, with a high-side view of $53.75 billion. With NKE stock still down heavily on a year-to-date basis, this is a discount worth considering.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
