October 5, 2016

Peak NIKE ?

Nike has been an institutional darling and sell-side favorite for years; in early 2016 its price-earnings multiple reached nearly 30.

As Jim "El Capitan" Cramer relates, the historical enthusiasm for the shares was not surprising considering the company's doubling in sales since 2007 and large gains in profitability.

Nike's shares, after peaking in November 2015 at about $70 a share, now stand at under $54 a share after reporting two consecutive quarters of slowing comp sales (the minuscule rise in North American future orders were eye opening) and a contraction in gross margins. The stock is the worst-performing equity (year to date) in the Dow Jones Industrial Average. 

The (downside to the) life cycle of companies is swift these days, with innovation transforming the competitive landscape of numerous industries and companies and, especially in consumer franchises, with the ebb and flow of popularity moving as swiftly as a Sandy Koufax baseball.

Like Nike, I see a shifting competitive landscape for similarly popular companies like Apple, Starbucks, Coca-Cola and Disney (all of these I am short) and, in the fullness of time, reduced secular profit-growth prospects (compared to both history and consensus expectations).

Each of these companies, as I have written in my Diary, have different challenges. Some sell an expensive product that is exposed to demand elasticity, commoditization, a possible consumer slowdown and/or a maturing market. Others face changing consumer tastes, and others are threatened by technological innovation.

But, from my perch, they all share a common characteristic of Nike: Both their rate of EPS growth and the returns on invested capital have likely peaked, and they're substantially higher (with the exception of Apple) than market valuations are vulnerable.

They also all share marked reductions in share prices from recent highs:
Apple $132 to $115
Starbucks $63 to $54
Coca Cola $47 to $42
Disney $120 to $91

And with my forecast of less-than-stellar future earnings prospects could come even lower stock prices and a cheer from the ursine crowd who, through hard-hitting analysis and skepticism, adopted (ahead of the consensus) a negative and contrarian point of view.

This, as I mentioned in my opener, is the essence of what I try to deliver in my Diary.

Position: Short AAPL, KO, SBUX (small), DIS (small)