Why It Might Be Time to Dump Nike

Is Nike (NYSE: NKE  ) headed higher or lower? That's the question we ask when we evaluate insider buying and selling. We ask because how executives spend their paychecks is often a reflection of what they think of their companies' prospects.

Of course, not all buys are equal. According to two decades worth of research from Dr. H. Nejat Seyhun compiled in his book Investment Intelligence From Insider Trading, buying is most predictive when it (a) comes from the CEO or other top-level executive, and (b) it's performed in bulk. Seyhun found buys of between 10,000 and 100,000 shares to be most informative.

How do Nike's managers measure up against Seyhun's benchmarks over the past year? See for yourself:

Insider Rating Bearish. Volume sales easily outnumber buys, and several sells at or near recent prices.
Business Description One of the world's leading suppliers of athletic apparel.
Recent Price $81.03
CAPS Stars (out of 5) ****
Percentage of Shares Owned by Insiders 18.42%
Net Buying (selling)* ($76.5 million)
Last Buyer (% increase)

John Lechleiter, director

500 shares at $79.48 apiece on Oct. 4, 2010

(increased direct holdings by 100%).

Last Seller (% decrease)

Jeanne Jackson, president, direct-to-consumer

3,031 shares at $80.45 apiece on Oct. 1, 2010

(reduced direct holdings by 14%).

Competitors

Callaway Golf (NYSE: ELY  )

Columbia Sportswear (Nasdaq: COLM  )

Under Armour (NYSE: UA  )

Sources: Form 4 Oracle, Capital IQ, and Motley Fool CAPS. Data current as of Oct. 27. *Open market sales and purchases only.

What we're tracking here, and why
Insider buying data can be confusing. Here, I'm concentrating only on buying and selling conducted in the open market. With most of these transactions, insiders control the timing. Other times they're buying or selling under the purview of a 10b5-1 plan. Either way, personal holdings are being bought and sold.

Those personal holdings matter the most -- they're the shares executives hold for investment, rather than compensation. Employee stock options are different; they're compensatory in the purest sense. I've stripped out options-related buying and selling from the calculations you see above.

The Foolish view: bearish
Are insiders trying to cash in on Nike's Big Brand and recent deal with the National Football League? With more than $76 million in stock sales over the past year, it sure seems like it. Fools don't appear to care.

"Nike has and always will be one of the strongest footwear companies. The current mini-depression has a chance to knock out a few of Nike's competitors. With the competitors gone Nike will get more business, which will result in higher stock value," Foolish investor mtschwaiger wrote over the summer.

Fair point. Callaway Golf recently reported lower sales and a net loss of $0.33 for the third quarter. But has Nike run too far, too fast? The stock touched a 52-week high of $83.40 on Oct. 12, and recent insider sales have come in near that level.

It's tough to blame management for taking profits. Nike has a tough, thriving competitor in Under Armour, yet still trades for more than 24 times normalized earnings -- a level last seen in 2003. That wouldn't be so bad if Nike were still a growth company, but analysts are expecting just 12% annual earnings improvement from here. I'd be selling, too.

Do you agree? Disagree? Log into Motley Fool CAPS today and tell us how you would rate Nike. You can also add the stock to your watchlist.

And if you want me to take a Foolish peek at the insider action of your favorite stock, email me here or use the comments box below. I'll write this column as often as you, our readers, demand.

For further Foolishness featuring Nike:

Nike is a Motley Fool Stock Advisor selection. Both our Motley Fool Hidden Gems and Motley Fool Rule Breakers services have recommended subscribers buy shares of Under Armour. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Under Armour and is also on Twitter as @TheMotleyFool. Its disclosure policy has its eye on you.


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