G

Source: Nike

Nike (NYSE:NKE) stock is clearly running ahead of the pack: Shares of the sports clothing leader are up over 30% year-to-date, crushing the broad market as the S&P 500 index struggles with a 5% loss over the same period. However, investment decisions need to be based off future possibilities, not past performance. Is now the right time to buy Nike?

Playing like a champion
Nike is arguably the most popular and recognized brand in its industry. The company has invested significantly over the decades in sponsoring the most talented athletes in different disciplines, and the Nike swoosh is a symbol of quality for consumers around the world. Management has smartly capitalized on this strength, generating value for shareholders by expanding into different markets over the years.

The company has a consistent track record of solid financial performance over the long-term, and data from the latest earnings report confirms that the business keeps firing on all cylinders in spite of economic instability in many emerging markets.

Sales during the quarter ended in August grew 5% year-over-year to $8.4 billion. Performance was much stronger when excluding the negative impact from currency movements -- constant currency sales jumped 14%. Worldwide future orders were up by 9% in U.S. dollars and 17% when excluding currency effects, and this bodes well for growth figures in the coming quarter.

Growth was quite strong across different geographies, and Greater China was especially reassuring with a year-over-year increase in constant currency revenue of 30%. Wall Street analysts have been particularly worried about the Chinese economy lately, yet Nike keeps proving that it has enough strength to continue delivering solid results in a challenging environment.

Profit margins are also moving in the right direction: Gross profit as a percentage of revenue jumped by 90 basis points to 47.5% of sales. This speaks wonders about the company's pricing power; besides, growing revenue from the direct-to-consumer segment is also driving higher profitability. Direct-to-consumer sales grew by an impressive 21% during the quarter, while online revenue jumped by a staggering 46%.

This combination between vigorous sales growth and rising profitability allowed Nike to deliver a 23% increase in earnings per share, reaching $1.34. The number was comfortably above expectations, since Wall Street analysts were on average forecasting $1.19 in earnings per share for the quarter.

A demanding price tag
Not everything is good news for investors in Nike, though. After several years of spectacular performance, the stock is trading at aggressive valuation levels. Nike carries a price-to-earnings ratio above 31 times earnings over the last 12 months, considerably above the average company in the S&P 500, which trades at a price-to-earnings ratio around 18 times.

Nike clearly deserves a premium versus the overall market due to its superior quality and consistent track record of growth. However, it's worth noting that the stock is also demandingly valued by its own historical standards. Various ratios such as price-to-earnings, enterprise value-to-EBITDA, and price-to-sales are all near record levels for Nike over the last decade.

NKE PE Ratio (TTM) Chart

NKE P/E Ratio (TTM) data by YCharts

The bar is set really high for Nike going forward, and current valuation levels don't leave much room for error if there is any disappointment over the middle term.

Is now the right time to buy?
Nike is a top-quality business to own for the long-term. The company's financial performance is downright impressive, and everything indicates that the company will continue on the right tack in the coming years. On the other hand, this outperformance is clearly priced into the stock, and this is always an important source of risk to keep in mind.

As opposed to going all-in at current prices, a better idea could be to take partial positions in different transactions over time, perhaps one-third or one-quarter of your intended total position each time. This way, you get to capitalize on any short-term pullbacks to buy a rock-solid business at a more convenient entry price.

Long-term investing success is like running a marathon, not a sprint. There is no need to go anxiously chasing behind Nike stock while it logs fresh highs at steep valuation levels. However, if there is any pullback down the road, just do it.

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nike. Try any of our Foolish newsletter services free for 30 days. 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 has a disclosure policy.