Chasing A Top In Nike (NKE)

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Nike Inc. (NYSE: NKE) is one of the ubiquitous brands of today’s world.  As long as it keeps doing what it is doing now and as long as it keeps its endorsements strong, it’s in a great place.  Frankly, I love the brand Nike from knowing that a certain size has always fit in shoes to knowing that a certain size always works in the shirts to knowing that its quality is high and it won’t embarrass you at a country club or out on Main Street.   

An article in this week’s "Inside Wall Street" in Business Week accounted for a 1% pop in after-hours trading Thursday. Business Week still moves stocks.  But when you look at the stock price target offered up is and then compared it around to other targets from other analysts, you might wander if there is much value to the stock.

The article points to magical Goldman Sachs target that has been raised to $71 from $67 in the last 6-months.  The article talks about the close having been $67.97.  That was Wednesday’s close.  Thursday shares closed up 1.3% at $68.90 and traded up to $69.65 in after-hours trading.  If you got the after-hours print you could expect about a whopping 1.8% return before any transaction fees to Buy and Sell.  If you got Thursday’s closing price, then you’d be expecting a 2.95% gain before fees to buy and sell.  And if you got the magical Wednesday cut-off piece of $67.97, then before buy/sell fees you’d have a whopping 4.2% gain if that $71 target comes.  The average target on Wall Street is slightly over $72.00.

Frankly, a Certificate of Deposit or CD from a risky FDIC-chartered bank that needs capital is a better reward.  BankRate.com is advertising a 4.20% yield CD from Countrywide with FDIC insurance.  You are insured by the Feds and as long as the bank doesn’t implode then you get the CD interest.  If Nike heads south or has a factory problem or has any supply constraints of raw materials or supplier/contract issues, it will take fire immediately.  Add in Nike’s 1.3% dividend and we’re still talking about showing up to the batters box with the little game night kids bats they give out at pro-baseball games.

We do not like to bash other reports or other reporters or analysts out there and that isn’t the point.  But if we are all chasing this sort of expected return, then we’ll all be calling each other Commerade and we might even start believing the Labor Department has its economic numbers right and that there is no core inflation.

Nike’s market cap is now north of $34 Billion.  I’s a mature company that still grows and is a growth company outside the U.S. in emerging markets.  But it is a mature company.  When we covered this around last earnings it looked fairly priced.  Even though it has risen since, now it still just looks fairly priced with a potential topping-out phase either in place or coming up soon.

Nike gained more than 30% in 2007, roughly 16% in 2006, gave a slight negative return in 2005, and gave an above 30% return in 2004.  Unless there is a massive wave of price target upgrades, it’s safer to wait for a good pullback on a news item or outside event on this one.  A prudent speculator might even say, "Just Don’t!"

Jon C. Ogg
April 4, 2008

Jon Ogg produces the Special Situation Investing Newsletter; he does not own securities in the companies he covers.