Over the trailing five- and 10-year periods, Nike's (NKE) stock has produced stellar returns of 129% and 353%, respectively, handily beating the S&P 500. Investors who simply bought shares for no other reason than they loved the company's products would've done extremely well. In fact, that's the approach popularized by famous investor Peter Lynch.
However, when thinking of stocks that investors can buy and hold for a long period of time, it comes down to a business that is durable more than anything else. And this means staying relevant in the eyes of consumers not just now, but far into the future.
Nike has proven in the past that it fits this description. I expect much of the same going forward. And this makes its stock a compelling portfolio addition for ultra-long-term-focused investors.
Leveraging its powerful brand
Nike's competitive advantage stems from its powerful brand recognition, a key attribute that isn't going anywhere. The business has a winning culture that is exemplified by its ability to introduce exciting new products that customers can't seem to get enough of on a consistent basis.
Signing top-class athletes like LeBron James, Cristiano Ronaldo, and Tiger Woods to high-value endorsement deals certainly helps bolster the brand's image. In the company's latest quarter, demand creation expense -- which includes these endorsement contracts, as well as other brand and advertising spending -- grew 20% year over year to $854 million. This strategy is working, as Piper Sandler's spring 2022 Taking Stock With Teens survey revealed that Nike is the most popular apparel and footwear brand by a strikingly wide margin.
Two ongoing initiatives will help to keep Nike's brand in first place. For starters, management is focusing on tightening its distribution strategy. Over the past four years, it has decided to cut wholesale accounts by more than 50% in the hopes of avoiding costly merchandise markdowns and maintaining greater control over inventory. Furthermore, investments made in digital capabilities as part of the Consumer Direct Offense (and updated Consumer Direct Acceleration) strategy are meant to drive faster product introductions and deeper connections with customers.
Having unrivaled customer mindshare means that Nike will remain relevant for a long time. And this will support the company's success not just years, but decades, from now. Continuously investing to keep the brand strong supports this outlook.
Nike isn't the best in its category
Even with all the positive characteristics of Nike's successful business, I still don't think it's the best investment in its own industry. In my opinion, that title goes to Lululemon (LULU). It has posted much faster revenue and profit growth than Nike in recent years while also carrying better margins. And its stock price has climbed a remarkable 600% since May 2017.
But this perspective only strengthens my argument about Nike being a buy-and-hold stock. Investors, including myself, are always enamored with the shiny new object. With its higher price-to-earnings multiple, the shiny object is certainly Lululemon right now in the athletic apparel market. Nonetheless, I think Lululemon's increasing brand strength, premium pricing, and growth potential are the main reasons why I like it.
However, if I had to pick one stock for the next few decades (as opposed to the next five years), as the title of this article points to, it would have to be Nike. And again, it comes down to durability. Nike was founded in 1964, while Lululemon started in 1998. This means that the former has been more battle-tested. And it has a longer and more proven operating history, which adds to the confidence in owning the stock well into the future.
And that's what a buy-and-hold investment strategy is all about. It's about trying to achieve adequate returns for as long as possible while constructing a portfolio that helps investors sleep well at night. Buying Nike shares can do just that. It's about as close to "set it and forget it" as you'll get in the stock market.