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This Company Could Defy the Bull

This Company Could Defy the Bull

Jim Cramer, the CNBC personality, often says that there’s always a bull market somewhere. He’s right. The bull market might be short lived and it might just be in a few stocks. But traders can benefit from moves like that.

This week, there could be a bull market in Nike (NYSE: NKE).

NKE daily chart

Earnings Awaken the Bull

Barrons recently explained the jump in the stock’s price:

“In Nike’s latest quarterly results, the maker athletic apparel and footwear earned 52 cents a share, on revenue of $9.37 billion. Analysts were looking for EPS of 46 cents on revenue of $9.17 billion. Gross margins expanded 80 basis points at 43.8%, also ahead of the 43.5% consensus estimate.

As for specific segments, Nike’s North American sales climbed 9% in the quarter, and it saw a 14% gain in sales in Europe, the Middle East, and Africa. In greater China, sales soared 31%, while the rest of the Asian-Pacific region and Latin America climbed 15%. Footwear revenue rose 15%, apparel was up 14%, and equipment sales grew 4%.

Looking ahead, Nike sees revenue climbing in the high-single digit range, or possibly low-double-digit range (on a currency-neutral basis) for the full year, compared with the 7.5% consensus estimate.

It expects gross margin expansion will continue about in-line with the 70-basis-point expansion seen in the first half of its fiscal year. For the current quarter, Nike expects high-single-digit revenue growth, in line with the 7% analysts are predicting.”

The results got a warm reception from analysts, including JPMorgan —one of at least two firms that upgraded Nike on the report.

Analyst Matthew Boss cited Nike’s “trifecta” of rising sales, an expanding earnings before interest and taxes margin, and higher gross-profit guidance when he boosted his rating on the shares to Overweight from Neutral, with an $85 price target.

Boss believes strong demand and a robust pipeline should sustain high-single-digit top-line growth and allow Nike to return to a midteens EPS growth rate in fiscal 2020 for the first time in three years. With the stock off more than 20% in recent months, he sees an attractive entry point.

Stifel’s Jim Duffy, meanwhile, reiterated a Buy rating and $96 price target on the shares. He believes there is still upside potential to revenue and forecasts.

He has “confidence in Nike to execute through macro related challenges into fiscal 2020 and gain share.” For him, that makes the company “as a solid core holding for large cap growth investors.”

Susquehanna’s Sam Poser reiterated a Positive rating and $100 price target.

“Improvements in the scarcity model, the speed of the product pipeline, and digitally-driven consumer engagement are still in their early stages and should continue for the foreseeable future,” he wrote.

For Telsey Advisory Group’s Cristina Fernández, Nike is her top pick in the sporting goods sector. She reiterated an Overweight rating and $92 price target.

Other analysts weren’t swayed from their stance on the sidelines, even though they liked the quarter.

  1. Riley FBR’s Susan Anderson, Jefferies’ Randal Konik, and Needham’s Rick Patel all praised the results, while keeping a Hold rating or the equivalent, citing valuation as their main concern.

Edward Jones’s Brian Yarbrough, however, cited a “slowdown in athletic footwear and apparel sales as well as market share losses for Nike due to competitors offering more compelling products, which will most likely cause a slowdown in earnings growth for the next few years.”

But, for now the trend is up as a potential bottom can be seen in the chart.

NKE weekly chart

However, in this market, it’s important to manage risk as some strategies can do rather well.

Trading the Trend

When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.

Among those strategies is a bull put spread that could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up trend.

bull put spread

Source: The Options Industry Council

This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.

Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.

Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.

A Specific Trade for NKE

For NKE, a bull put spread could be opened with the April 18 put options. This trade can be opened by selling the April 18 $65 put option for about $3.85 and buying the April 18 $70 put for about $6.10.

This trade would result in a credit of $2.25, or $225 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade in NKE.

The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $5 ($70 – $65). This is multiplied by 100 since each contract covers 100 shares.

Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $275 ($500 – $225).

The potential gain is about 18% of the amount of capital risked in NKE.

The bull put spread in NKE is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.

These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.