Although the S&P 500 is up 17.5% in 2023 (as of Aug. 2), not all companies have participated in the broader market's huge rally this year. For example, Nike (NKE 0.40%) shares are down 8%, while Foot Locker (FL 3.92%) stock has dropped an alarming 33%. For those investors looking at beaten-down stocks for potential opportunities, maybe there's something here. 

When looking at these businesses, is Nike or Foot Locker the better buy? Let's take a closer look at the apparel and shoe specialist, as well as the retail company, to come up with a final conclusion. 

A strong brand boosted by a huge digital presence 

I don't believe there's any doubt that Nike's greatest strength lies in its brand. Over the past few decades, the company has invested heavily in bolstering its brand image across the world, which consumers identify with innovative, sleek, and high-quality clothing and shoes, as well as a winning mentality. People are inclined to pay premium prices, as evidenced by Nike's gross margin of 43.5% in fiscal 2023. 

The brand is boosted by Nike's impressive digital foundation. Management says that its digital properties, including apps like the flagship Nike app, SNKRS, Nike Run Club, and Nike Training Club, had over 500 million visitors in the quarter. This can not only provide meaningful connections with consumers, but it also helps Nike collect huge amounts of data that can inform marketing and new product strategies. 

After pandemic-related disruptions, Nike's business is back to registering healthy growth. Revenue increased 5% in the most recent quarter (the fiscal fourth quarter of 2023 ended May 31), with growth across all regions. The Greater China market, where sales gains were the highest, is poised to become a more important driver of financial results in the decade ahead. 

Investors are being asked to pay a trailing price-to-earnings (P/E) multiple of 33.5 to buy Nike shares right now. That certainly isn't cheap, but when you consider the company's long history of revenue and earnings growth, it could be worth paying up for. 

A struggling retailer with a downgraded outlook 

To say that Foot Locker is dealing with some challenges would be an understatement. In the most recent quarter (the fiscal first quarter of 2023 ended April 29), the sports apparel retailer generated revenue of $1.9 billion (down 11% year over year) and net income of $36 million (down 73%). Both figures missed Wall Street expectations. 

Making matters worse, the leadership team downgraded its guidance for the full year. Executives now expect sales to fall between 6.5% and 8%, with margins contracting. The store base has also been shrinking. 

It's also difficult to identify any competitive advantages for Foot Locker. As a consumer, it's easy to see the vast number of shopping destinations out there, demonstrating the intense competition in the industry. Foot Locker's most formidable brick-and-mortar opponent is Dick's Sporting Goods. And on the e-commerce front, customers can now more seamlessly purchase products directly from the companies that design and manufacture them, like Nike. 

For those investors who understand and accept these issues, Foot Locker might still make for a compelling investment for one reason and one reason only: its low valuation. The stock has gotten hammered this year, and it's down more than 30% in the past 10 years, currently selling for a trailing P/E below 10. But just because a stock trades at a cheap multiple, it doesn't mean that it will be a successful investment. Keep that in mind. 

The winner 

Nike clearly possesses very positive traits from an investment perspective. And on the other hand, Foot Locker will likely continue facing challenges. These reasons make Nike the better company to buy in my opinion. 

And probably most importantly, I think that Nike is far more important to the success of Foot Locker than the other way around. In fact, more than half of Foot Locker's revenue comes from the sale of Nike-branded merchandise. This situation puts Nike in a more favorable competitive position, making it the superior stock to own of the two.