Portfolio managers Bill Ackman and Jeff Yass share very little in common. Ackman is an activist investor who takes large positions in a small cohort of stocks. His fund, Pershing Square Capital Management, manages over $10 billion across just nine positions. In contrast, Yass helps manage Susquehanna International Group (SIG) -- a $57 billion fund with more than 5,500 positions.
While taking a look through the most recent 13F filings for Pershing Square and SIG, I noticed something interesting. Last quarter, Ackman's fund initiated a new position in shoe and apparel company Nike(NYSE: NKE). Meanwhile, SIG -- which already had a stake in Nike -- increased its position in the stock by 943%, buying nearly 5.5 million shares.
On the surface, these purchases look questionable. Nike stock has cratered by 27% so far in 2024, making it one of the worst-performing companies in the Dow Jones Industrial Average.
Let's dig into what's going on at Nike, and assess why Ackman and Yass may be interested in the stock. After a thorough analysis, investors may come to see that Nike has the makings of an interesting and potentially lucrative opportunity right now.
What's going on with Nike?
The chart below paints a pretty interesting picture for Nike. Over the last decade, the company managed to grow revenue and profit considerably. However, in more recent years, Nike's sales and profitability have undergone a noticeable deceleration. While shopping patterns among consumer discretionary goods have certainly been affected by inflation and a high-interest-rate environment over the last couple of years, Nike's problems are much more nuanced.
NKE Revenue (Annual) data by YCharts.
Over the last few years, Nike adopted a new distribution strategy in which it removed its products from several brick-and-mortar retail stores and opted to double down on a digital-first approach. In theory, this decision makes a lot of sense. By removing third parties from the equation and marketing directly to customers through its own website and app, Nike hoped to lower its expense profile while generating more margin among its shoppers -- thereby driving more efficient unit economics.
Unfortunately, this strategy did not pan out as management had hoped. In a way, Nike unintentionally allowed its brand to become overshadowed by other shoe and apparel makers after removing its products from several major retail distributors. This has caused Nike to lose touch with consumers, particularly younger demographics that have shown some favorability toward other shoe companies such as Crocs, Birkenstock, On Holding, and Allbirds.
Given the hiccups in Nike's strategy and the headwinds it's brought to the company financially, I was not surprised to see the company part ways with CEO John Donahoe last month.
Image source: Getty Images.
A look at Nike's valuation
In my opinion, valuing Nike stock correctly is a particularly challenging exercise. A new CEO coming in almost certainly means changes are coming -- be it in the core business, organizational structure, or marketing campaigns, I think it's fair to assume that Nike is going through a bit of a turnaround at the moment. All these parameters make it hard to accurately forecast Nike's growth over the next couple of years, as I suspect many of the changes brought by new management will take some time to bear fruit.
NKE PE Ratio (Forward) data by YCharts.
The chart above shows trends in Nike's forward price-to-earnings (P/E) multiple over the last year. While there have been some pronounced ebbs and flows in Nike's valuation, I'd like to point out that Nike's current forward P/E ratio is essentially back to where it was 12 months ago.
Could investing in Nike stock now be a lucrative move in the long run?
Since Nike's business is at a crossroads and many question marks surround the company's future, I find the rebound in the company's valuation as shown above to be a little convoluted. To me, it seems that investors are bullish on the CEO transition, but may be pricing some of the upside from Nike's turnaround into the stock already.
Nevertheless, I do think Ackman and Yass could be on to something. Despite its lackluster performance and rising competition, Nike still remains one of the most recognized and valuable brands in the world.
I think Nike could emerge as a winner in the long run, and I am cautiously optimistic that its turnaround efforts will be well-executed. However, investors should have ample opportunities to invest in Nike stock at more reasonable valuations while the turnaround efforts take shape. For this reason, I think prudent investors are better off monitoring the stock for the time being.
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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends Crocs and On Holding. The Motley Fool has a disclosure policy.
