Uncertain stock market times tend to drive wealthy investors and the institutions that typically manage their money into safer, low-beta stocks with a good story. Today, the apparel sector could be a top recommendation at investment houses like Fisher Asset Management. While you can blindly pick stocks in this space and make a decent profit, it is wise to only side with the best this cycle.
You will see how the entire macroeconomic landscape in the United States, particularly with the uncertain timing surrounding interest rate cuts proposed by the Federal Reserve (the Fed), makes industry-leading stocks like Nike Inc. (NYSE: NKE) the ones to bring you the stability you need with as much growth as you’d expect from a smaller technology stock.
But before you jump into the weeds of why Nike can be the safest stock to find growth in this cycle, you should understand the reasons behind Wall Street analyst preference in it. You will get a glimpse of the “top-down” analysis these professional traders employ to find attractive opportunities, so get ready to dig in and break down the path that leads to Nike.
A Good Idea
That's why some would call investing in Nike a good idea. But what constitutes a good idea at the big trading firms? Well, it all starts with understanding the economic environment in which you currently operate. While you can check thousands of sources to come up with a thesis, here's a start.
One of the most widely followed indicators for idea-generation is the ISM manufacturing PMI index. Taken as a trend of the last three months (a whole quarter), the apparel industry is calling the shots in a potential breakout of the manufacturing sector.
The entire space contracted heavily in December but has since been reading expansion readings more and more aggressively. That explains the flattish performance in December for the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA: XLY), followed by a rally of up to 7% in the January-February period.
However, not all apparel stocks are made equal. Some are betting that names like Ermenegildo Zegna (NYSE: ZGN) could rally by double-digits in the coming quarter. In contrast, others like Tapestry Inc. (NYSE: TPR) don’t look so hot.
This is due to their revenue exposure. If the Fed cuts interest rates, the Dollar index could fall against other foreign currencies. This would be bad for domestic demand, and stocks like Tapestry, which gets most of its revenue from the U.S. market, could see some headwinds.
On the other hand, Zegna derives most (65% plus) of its revenue from international sales, which would see a boost on a weaker dollar. For this same reason, Nike's size and international penetration earn analyst love and some institutional money to pair.
Just Upgrade It
You can imagine some of Wall Street’s analysts saying this to each other as they chose to boost Nike’s price targets. Those at J.P. Morgan Chase & Co. (NYSE: JPM) see a valuation of up to $128 a share for Nike stock, calling for a 26% rally from today’s prices.
Considering Nike’s massive $150 billion market capitalization, double-digit rallies must come from high conviction projections. While the rest of the industry is set to grow its earnings per share (EPS) by an average of 12% next year, these analysts expect Nike’s to blow past at almost 17%.
A worthy competitor is found in Lululemon Athletica (NASDAQ: LULU), but the story stays the same. By focusing its sales in the U.S., that stock only calls for an 8% upside as analysts assign a $494 price target today. More than that, it trades at 88% of its 52-week high when Nike offers you a discount of 79% on its 52-week high price.
Another example of the effect of sales exposure and today's market outlook is Deckers Outdoor Co. (NYSE: DECK). By also focusing most of their sales in the U.S., the added currency risk is drawing analysts to set a 4% downside in their $855 a share price target.
The writing is now on the wall, and a catalyst that you could look for is the coming quarterly earnings announcement this week.
Knowing what you know now, it would be no surprise to see increased future guidance from management, especially as the industry keeps heating up and international sales come to boost EPS for Nike in the coming quarter.
