Great Stocks Near A 52-Week Low Part 1: Nike

| About: Nike Inc. (NKE)

Summary

I don't think the bull market is over yet.

There have been several sectoral corrections in this bull market.

Opportunities in this bull market.

Introduction

Since the election of Donald J. Trump as the next president, this long bull market has shown that it still had enough vitality in it. Like a young steer the DOW industrial (NYSEARCA:DIA) jumped to all-time highs:

^DJI Chart

^DJI data by YCharts

I would be very surprised if the S&P 500 (NYSEARCA:SPY) wouldn't follow in the footsteps of the Dow any day now. It is just 20 points away from its all-time high from August 16th 2016.

^SPX Chart

^SPX data by YCharts

Unlike a lot of other investors, I don't think this bull market is going to stop any time soon. This is not exact science, though, as it never is in the stock market. The only certainty is that it will stop at a certain moment. All the rest is speculation.

But I think there are some pretty good arguments to be of the opinion that the bull market will not stop soon. First, I don't see a bull market of 7 years old, but only of 5, starting in 2011. But even if you take 2009 as the starting year of the bull market, it doesn't mean that a bull market will stop just because it is so old. As many people have stated before, this is the slowest recovery ever. If you go slow, you walk longer. Also, mostly a bull market explodes in utter euphoria, which has not been the case at all in the last years. As John Templeton famously said:

Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.

I think we are still in the skepticism phase and not at all in the euphoria phase.

But the point I am really trying to make here is that there have been several sectoral bear markets in this bull market. Oil has had its bear market, industrials have had theirs, healthcare had a steep decline from its highs in 2015, restaurant stocks have been struggling in 2015 and 2016, coal was trading at levels as if it was going to disappear in a year and what more. Hey, even fashionable stocks like Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) went down 25% at a certain moment. All these little bear markets give oxygen to this bull market.

AMZN Chart

AMZN data by YCharts

Opportunities in this bull market

These sectoral corrections offer a lot of investing possibilities. Quite some high-flying birds have come down to earth to meet the ordinary investor's principles. I have already written an article about taking advantage of the healthcare correction, with a focus on DGI investing. In this article series, I will do the same for some other stocks, but without specific DGI perspective, although the candidate of today is very attractive for DGI investors as well, I think.

Nike (NYSE:NKE)

Nike has had a tremendous run from the very moment it was founded by Phil Knight in 1962 as Blue Ribbon Sports. I am reading Knight's autobiography Shoe Dog right now and I must say that I am impressed by both the literary as educational side of this book. Knight and co-founder Bill Bowerman, his former university athletics coach, started with an idea to import Japanese running shoes. Through constant innovation and investing, Knight and Bowerman could turn their initial $500 investment to one of the most famous brands and one of the biggest companies in the world.

Morningstar has a four stars rating on Nike, which means that it considers the stock undervalued. Gurufocus gives it a four stars rating as well, which means that the stock is highly predictable. Only 6% of all stocks are ranked higher in predictability. That means only 144 stocks out of 2403 (not all stocks are rated). Only 8% of four stars stocks are in a loss after 10 years, while this is 45% for all 1 star rated stocks (almost 77% of all stocks). The average gain after ten years of four star rated stocks is 278%, which means that if you would invest $10.000 now, you can expect $37.800 in a decade's time on average. That is an average CAGR of 13.2%.

Nike has a current P/E of 23.02 and a forward P/E of 18.99. It has a 5-year average P/E of 24.7 and a 10-year average P/E ratio of 22. So it is probably somewhere between fairly valued and slightly undervalued, based on the P/E.

Nike's stock may be one of those few companies that combines both growth and value. Nike is a dividend contender on the list of David Fish, with a 14-year streak. Its dividend rate is $0.64, which means it has a ttm yield of 1.25% with the Friday November 18th closing price of $51.10. But the company has announced 12.5% raise just a few days ago. This will bring the dividend to $0.72 starting in January 2017, which gives a yield of 1.4%. This is quite a bit above its all-time dividend average of 1.19%.

For dividend investors, 1.4% doesn't seem to be very much, but if you look at the dividend growth, you see that the quite low yield is because the stock price goes up together with the dividend. Both the 3-year and the 5-year dividend growth rate are about 15%. The Chowder Rule says that if a stock has a dividend yield of less than 3%, its five-year dividend growth rate plus its dividend yield must be 15 or higher. Nike has a 15% dividend growth both for ten and five years. If you add up the 1.4% dividend, then you see that Nike lives up to what I consider as one of the clearest and best DGI rules. I consider it especially attractive for DGI investors who are not near retirement yet.

The average dividend growth was 15% in the last decade and I see this average continue in the next decade. Maybe Nike's EPS growth could slow down a little bit, but I still see a growth of at least high single and more likely low to middle double digits. If you know that Nike's payout ratio is only 28%, then you know there is still a lot of dividend pleasure to be had in the next decade. If Nike would keep it current dividend growth rate of 15%, you would have almost 5% of yield on cost in 10 years time with its current price. And then it would still go up and up in the decades to follow.

NKE Chart

NKE data by YCharts

Besides this long term dividend value, Nike's price will probably go up a lot, too, in the next decade. I think its price could double in the next five years alone. This might sound ambitious, but it means a growth of 15% per year. Of course, the stock market is unpredictable. But the question is not if the stock will double but if it has the ability to double. The best ratio to use here is EPS. If those go up and the valuation stays the same, then you get what you want.

Think of the famous quote of Benjamin Graham: "In the short term the stock market is a voting machine, in the long term a weighing machine." He meant that stock prices tend to follow earnings in the long run. The estimated EPS growth for Nike for the next five years is 13.54%, according to finviz.com. If the price would follow EPS, this would be not enough for a doubling of the price, but we will have a look at the earnings surprise history of Nike of every quarter since 2010.

Source: Streetinsider.com

In 24 quarters, Nike had 21 earnings surprises, with an average earnings surprise of 12.3%. So if this continues, this 13.54% is in fact 15.21% of annual growth. This is merely a math game of course because you should not forget that these numbers are estimates and what is a 1% mistake for a forecast about a five-year period? But the bottom line is that I think Nike really has the ability to double in five years' time.

Conclusion

I tried to show in this article that Nike is a very attractive stock that combines both growth and value, with an attractive dividend that should attract DGI investors who are not near retirement. I think its current price near a 52-weeks low is a very attractive investing opportunity to start a position or add to an existing position. I have been averaging down myself, which results in being just 1.5% under water, but I would get exited if Nike would drop further. Even though it is already my third biggest holding, I wouldn't mind buying more if it would drop further.

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Disclosure: I am/we are long NKE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.