Just do it? This billionaire just bought Nike stock, should he?

Billionaire Bill Ackman and his fund Pershing Square Capital were busy picking up stocks NIKE (NKE 0.55%) in the second trimester. The hedge fund manager has a highly concentrated long portfolio, holding just nine stocks at the end of the second quarter. Let’s look at what might have drawn Ackman to the stock.

An iconic brand

Nike is an iconic brand whose swoosh logo is one of the most recognizable in the world. In the US, the company has approximately 97% brand awareness, while its products are well known worldwide.

Nike has been able to build its reputation as a leader in innovation and style in sports apparel and footwear over the years. The company is also a marketing machine. He has endorsement deals with some of the most popular athletes around the world. It has also expanded to non-athletes with musicians and other celebrities.

Brand equity is extremely valuable and Nike has built an unrivaled reputation in sports apparel and footwear over the years. It has a loyal following and a strong reputation.

Image source: Getty Images.

Recovery potential

Despite its strong brand, Nike has had its share of struggles recently. Revenue rose just 0.3 percent in its most recent fiscal year, which ended in May, while fiscal Q4 sales fell nearly 2 percent. To make matters worse, the company projected that its sales for fiscal 2025 would fall by single digits after saying in March that it expected sales to rebound in the second half and see full-year sales growth in fiscal year 2025.

Nike expects first-quarter sales to fall 10% in its fiscal first quarter, and now sees high single-digit declines for the first half. Among the reasons behind its stark forecast were a soft wholesale order book, challenges in its digital business, a difficult Chinese market and the aggressive actions it is taking to manage its classic footwear franchises.

However, a tried and true method to help revive a stock is to set low expectations and then skyrocket over them. Given that Nike was only on top of their Olympics, it seems like the company was doing just that when it projected such a big drop in fiscal Q1 sales.

The company introduced a number of new products and spent heavily on marketing around the Paris Summer Games. Those efforts appear to have paid off, with web analytics company SimilarWeb showing an increase in visits and sales to its website during the Olympics.

While a boost in sales from the Olympics doesn’t solve all of Nike’s problems, it could help it get over the low fiscal bar in the first quarter. Meanwhile, it also shows that the brand can continue to resonate with consumers and that, with the right marketing, endorsements and product innovation, the company can get back on track in the long run.

Low rating

Given its brand power, Nike has always traded at a premium valuation because it takes a very long time to build the kind of brand equity it has. However, the company’s recent struggles have caused its valuation to drop considerably. The stock now trades at a price-to-earnings (P/E) ratio of under 22.5, which is well below the 30-plus times it has often traded at over the past few years.

NKE PE ratio data (1 year ago) by YCharts

While the company is predicting some declines in sales (and earnings) this year, I don’t think it will be as bad as expected. Nike, meanwhile, is trading at one of its most attractive valuations in a long time.

Should investors follow Ackman and buy Nike stock?

I currently think the setup for Nike looks attractive in both the short and medium term. In the short-term, the company has set low expectations, which I believe it will exceed in full. In the meantime, I believe the Nike brand is still strong and resonates with customers.

While the company has some work to do to get back on track, its brand equity is undeniable and it has a long track record of success. I see no reason why Nike shouldn’t continue to be a long-term winner. As such, I would follow Ackman in the name and be a buyer of the stock around current levels.