When you get a chance to own a strong global business at a discount to the market, it's worth considering. That's the main rationale behind the "Dogs of the Dow" investing strategy, which focuses on the weakest performers in the famed index of 30 major stocks.
Yet, it's not a good approach to blindly purchase falling stocks. You'll get better results by focusing your investing dollars on solid companies that appear to be experiencing temporary challenges.
Nike (NKE 0.19%) fits that bill today. Let's look at some reasons to like this footwear and athleisure giant, which is among the worst-performing stocks in the Dow Jones Industrial Average in 2023.
1. Steady as she goes
It's true that Nike is seeing weak demand trends right now as spending slows in the core footwear industry. But sales look stable heading into the key holiday shopping quarter ahead.
Revenue was up 2% in the first quarter, which ran through late August, with growth in international markets like Europe and China offsetting a slight drop in the U.S. segment. "Results demonstrated the impact of staying on the offense over the past fiscal year," CFO Matthew Friend told investors in late September.
Investors can find faster growth elsewhere in the industry, whether it's with footwear specialist Crocs or athleisure seller Lululemon Athletica. Yet Nike's business is under no major stress right now, even though shares are trailing the Dow by 10 percentage points through early November.
2. Margins will rise
Retailers often target rising profit margins while failing to deliver on that promise. Nike's path toward increased profitability seems clear, though. Inventories this past quarter were down 10% to $9 billion, for example. Nike has been cutting inventory for more than a year, helping clear the way for its innovative new footwear releases to lift average selling prices.
Investors can already see early progress here. Rising sales prices offset exchange rate swings last quarter to keep gross profit margin steady at 44% of sales. This success allowed Nike to ramp up spending on its advertising, marketing, and brand promotions. Executives allocated $1.1 billion to this end, which they call "demand creation expense." It's a key factor keeping Nike in the leadership position in this highly competitive industry.
3. Valuation and outlook
Investors shouldn't expect a quick rebound for the business. Most Wall Street pros are projecting that sales will fall about 2% this fiscal year following last year's 10% increase.
But Nike should return to its more normal path of revenue growth as the industry emerges from the current cyclical downturn. Its light inventory position will allow it to maintain profitability, meanwhile, even as it continues to invest in competitive assets like branding and footwear innovations.
The stock's valuation has declined in 2023, helping lessen an investor's risk when buying the stock. Shares are priced at 3.2 times sales, down from over 4 at the start of the year. Lululemon is valued at nearly 6 times revenue, in contrast. While Nike isn't as profitable and has a weaker short-term growth outlook, investors should see that discount as a great reason to consider this stock today.
