Why Nike Shares Gained 11% Last Month

Sportswear and footwear company shares NIKE (NKE -0.25%) rose 11.3% during August, according to data provided by S&P Global Market Intelligence. For most of the month, the stock rose and fell with S&P 500. But it created some separation when news broke that Pershing Square had bought a stake in the business.

Pershing Square is the hedge fund for billionaire Bill Ackman — a value-minded investor with tons of name recognition. So when Ackman buys a company’s stock, he tells investors it’s an undervalued opportunity.

On Aug. 14, Pershing Square filings showed it had a $229 million position in Nike stock. On the one hand, this is the smallest position in his portfolio. On the other hand, Ackman’s hedge fund is only invested in eight companies, so any position is important, regardless of its size.

Is Nike Stock Really A Good Value?

Nike stock currently trades at about 22 times its earnings. And before the news from Pershing Square, it was trading at less than 20 times its earnings. Investors would have to go back to 2012 to find a time when Nike stock was this cheap.

NKE PE report data by YCharts.

Of course, there’s a lot more to capitalizing on the investment than that. Yes, Nike stock may not have looked this cheap in over a decade. But if it doesn’t create value for shareholders here, the relatively cheap price doesn’t really matter.

In Nike’s case, it generated more than $51 billion in revenue over the past 12 months. I would say it’s still a pretty relevant, global business. Plus, it’s still profitable, so it doesn’t necessarily destroy shareholder value. So this is a solid value-stock idea. But growth is slow and there are headwinds. So for this to ultimately be a profitable investment for Ackman in the long run, Nike needs to get some things right with the business.

What’s going on with Nike?

Sales fell modestly for Nike in its most recent quarter. And management says investors shouldn’t expect too much in the coming year as it’s a “transition” period. Work on interesting consumers with updated inventory to drive sales growth. But until that happens, its profits could suffer.

Nike stock is cheaper than where it normally trades, but not necessarily cheap on an absolute basis – there are plenty of value stocks in a similar position to Nike at a cheaper valuation. That being the case, I wouldn’t buy Nike stock unless I was more sure it had a proper turnaround plan.

For its part, Nike will report financial results again on October 1. This will give investors a better picture of recent business trends as management makes adjustments. If the trends are more positive, I would be more comfortable joining Ackman in Nike stock.