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Why Warren Buffett Would Love Nike Stock

By John Ballard - Mar 29, 2021 at 7:39AM

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The sportswear giant likely checks several boxes for the Oracle of Omaha.

Warren Buffett has a long history of investing in top consumer brands. Berkshire Hathaway owns several outright, including See's Candies, Dairy Queen, and Fruit of the Loom. Plus, two of Berkshire Hathaway's top stocks are Coca-Cola and Apple

If Buffett ever bought Nike (NKE 1.47%) stock, it would certainly fit the pattern of the types of companies he has previously invested in. Here are three reasons Buffett would love Nike.

Exterior of Nike store on a busy city street.

Image source: Nike.

1. A simple and marketable product

Buffett has often taught the importance of only investing in companies that you understand. Anyone can understand sneakers. Nike has been making performance shoes since 1972, and it's a good bet that it will continue dominating the footwear market for a long time.

When Buffett invested $1 billion in Coca Cola stock in the late 1980s, he credited management's use of great marketing and finance skills to grow the product around the world. Nike shares a similar success story.

Signing major sports stars like Michael Jordan made Nike a household name. Most of the top teams in this year's NCAA basketball tournament wear the Jordan or Nike brand. Getting its athletic wear on national TV in front of a large audience is an important reason why Nike has built one of the most iconic brands in the world.  

2. A wide competitive moat

If a business has been doing the same thing for nearly 50 years while delivering wealth-building returns for shareholders, that's a sign that the business possesses a durable competitive advantage -- another key characteristic that Buffett seeks out.

The athletic wear market is very competitive. Consider that Nike's $38 billion in revenue over the last year is just over 10% of the more than $300 billion that is spent every year on sportswear, according to Morgan Stanley. Clearly, many athletic wear shoppers still aren't Nike customers.

Still, the company has serious advantages over its competition. Nike holds patents on cushioning technology, manufacturing techniques, and even product design. The creative flare that produces those colorful sneakers in a range of styles has inspired other companies to up their game, but they don't have the swoosh logo.

One of the reasons Buffett invested in Apple stock was the enormous pull the iPhone has on people. Buffett would also appreciate the appeal that Nike has to the consumer. Sneakerheads check Nike's SNKRS app every day for the latest news on upcoming releases. Since the pandemic hit the U.S. in March 2020, Nike has added 70 million new members to its digital ecosystem. 

3. Consistency

Buffett's investment record reveals that he likes to invest in businesses, not great CEOs. He has often quoted famed investor Peter Lynch, who liked to invest in businesses so good that any "idiot" could run them, because sooner or later, an idiot probably would be running them. The point is that you want to invest in a company that is not dependent on a brilliant business mind but can prosper on its own merits.

Three CEOs have led Nike since co-founder Phil Knight stepped down from the role in 2004. No matter who has been running the company, it has continued to deliver market-beating returns to shareholders. That's the sign of a great business.

And Nike has consistently earned much better returns on invested capital than rival Adidas, as well as other top consumer-discretionary brands.

NKE Return on Invested Capital Chart

Data by YCharts. 

Over the last three years, Nike has also been executing on its Consumer Direct Offense strategy to double the speed to market for new products and grow e-commerce sales. These efforts are paying off. 

Nike was able to maintain positive sales growth during the nine-month period ending in February as new sneaker styles continue to hit the market at a blistering pace to capitalize on growing demand. In the most recent quarter, digital sales soared 59% year over year, which helped pull total revenue up 3%.

These are strong results given the challenging environment for retail during the pandemic, and they serve as a testament to the phenomenal brand strength Nike has in the marketplace.

The only thing Buffett might not like about Nike stock is the valuation. Shares currently trade at a high forward price-to-earnings ratio of 42, which is well above the levels 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 those investments. 

Nonetheless, I believe Nike possesses all the qualities that Buffett would want to see in a business worth owning long term.

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Stocks Mentioned

NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$108.00 (1.47%) $1.56
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$456,500.00 (0.10%) $468.99
Apple Inc. Stock Quote
Apple Inc.
AAPL
$137.59 (0.17%) $0.24
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$304.05 (-0.03%) $0.10
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$60.98 (1.63%) $0.98
Morgan Stanley Stock Quote
Morgan Stanley
MS
$79.37 (-0.74%) $0.59
adidas AG Stock Quote
adidas AG
ADDYY
$91.36 (0.07%) $0.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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