Nike Stock May Jump In First Half Of 2022
Geoff Considine, Ph.D | Jan 19, 2022 07:29AM ET
- Nike has had a volatile year and the shares are down 11.8% YTD
- The valuation is high
- Wall Street consensus is bullish, with about 25% expected 12-month gain
- The market-implied outlook for NKE is slightly bullish to the middle of 2022 but slightly bearish for the full year
I recall reading, long ago, that Nike (NYSE:NKE) is best described as a Theory suggests that the market-implied outlook is expected to have a negative bias because risk-averse investors tend to overpay for downside protection (put options). The equity risk premium exists (theoretically) because investors demand to be compensated to bear risk (they are risk averse), so the assumption of a negative bias in the market-implied outlook is sensible. With that in mind, a neutral market-implied outlook (matching probabilities as we see here) should be interpreted as being (at least) slightly bullish.
Looking out to the middle of 2022, using options that expire on June 17, 2022, the market-implied outlook is similar and is also interpreted as being slightly bullish. The annualized volatility calculated using this outlook is 31.8%.
Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.
The market-implied outlook for the next year (calculated using options that expire on Jan. 20, 2023) shifts to increasingly favor negative price returns (the red dashed line is above the solid blue line over the left half of the chart). I interpret this outlook as slightly bearish. The annualized volatility calculated from this outlook is 31.8%.
Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.
The market-implied outlooks for NKE are slightly bullish to mid-2022 but slightly bearish for the next 12 months. The expected volatility is stable through the year, at about 32%. My previous analysis, provided a (nearly) 11-month outlook for NKE that is qualitatively similar to the new 12.1-month outlook, although the current outlook has less of a bearish tilt.
Summary
In many ways, Nike is in a category of its own and, for this reason, peer comparisons are difficult. The shares are certainly expensive, but the P/E is well below highs from recent years.
Looking ahead, NKE increasingly focuses on the value of its design properties rather than on the utilitarian shoe business. The Wall Street analyst consensus rating is bullish and the consensus 12-month price target is 25% above the current share price. The market-implied outlook is slightly bullish to the middle of 2022, but slightly bearish for the full year. The expected volatility is about 32%.
As a rule of thumb for a buy rating, I look for an expected return that is at least half the expected volatility. The consensus for expected return from the analysts is far above this threshold. I am changing my rating on NKE from neutral to bullish, but I plan to revisit this analysis at mid-year.
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