Nike has been treading water for the past six months, recording a small loss of 1.7% while holding steady at $78.70. The stock also fell short of the S&P 500’s 10.3% gain during that period.

Is there a buying opportunity in Nike, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Nike Will Underperform?

We don't have much confidence in Nike. Here are three reasons we avoid NKE and a stock we'd rather own.

1. Declining Constant Currency Revenue, Demand Takes a Hit

We can better understand Footwear companies by analyzing their constant currency revenue. This metric excludes currency movements, which are outside of Nike’s control and are not indicative of underlying demand.

Over the last two years, Nike’s constant currency revenue averaged 4.4% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Nike might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Revenue Projections Show Stormy Skies Ahead

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Nike’s revenue to drop by 1%. While this projection is better than its two-year trend, it’s hard to get excited about a company that is struggling with demand.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Nike’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

We see the value of companies helping consumers, but in the case of Nike, we’re out. With its shares underperforming the market lately, the stock trades at 46× forward P/E (or $78.70 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. Let us point you toward one of Charlie Munger’s all-time favorite businesses.

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