Beaten To a Pulp (Is It a Buy?)

How the mighty have fallen.

There’s a subset of the S&P 500 index called the S&P 100. The 100 stocks that belong to this index are the bluest of blue chips.

As of today, Nike (NKE) is no longer a part of this illustrious group.

The keepers of the index have kicked it out after 18 years.

Little wonder. The company’s share price is one-fourth of what it once was. $230 billion in market value, vaporized.

We won’t dwell today on what went wrong. (You can read about that almost anywhere.) Instead, we’ll focus on one question: Has this bloodied blue chip fallen so far that it’s now a buy?

Even if you’ve come to hate Nike and refuse to buy its gear on principle, you’ll want to read the following to get better acquainted with the thinking of Wall Street legend JC Parets – the newest member of the Paradigm team. 

Is Nike Finally Cheap Enough?

Nike (NKE) is getting absolutely destroyed.

In November 2021, the stock traded as high as $179.10. On Friday, it closed at $37.08. That's a 79% collapse.

If you put $100 into NKE near the top, you'd have about $21 left today.

And we're not talking about some little company nobody’s ever heard of. We're talking about Nike.

The Swoosh. "Just Do It." Michael Jordan. Tiger Woods. Serena Williams. LeBron James.

This is one of the most famous brands on Earth. And its stock just fell to the lowest level in a decade:

This isn't a bad month. It's not even a bad year. Nike has been falling for almost five years.

That's what makes this so interesting. Because at some point, a terrible stock can become so beaten up that I have to start asking a different question.

Not "How bad is Nike?"

We already know it's bad.

The question I'm asking now is “Is Nike finally bad enough?"

I Had To Zoom Out

Whenever I see something this extreme, I like to zoom out.

Here's Nike going all the way back to the 1990s:

See that blue line underneath the stock? That's called an anchored volume-weighted average price, or AVWAP.

Think of it as the average price Nike investors have paid since the most important low in the stock's history.

And right now, that number’s around $40.

Look at the chart. NKE’s spent almost the entire past 25 years above that line.

It tested this long-term average around the financial crisis in 2009. And now, after one of the worst selloffs in Nike's history, we're back here again.

That's wild.

Nike has lived through the dot-com crash, the financial crisis, a pandemic, recessions, inflation, wars, and a lot of ugly markets.

And yet we almost never see the stock down here.

That's why I'm paying attention. Not because a blue line has magical powers. It doesn't. And not because Nike is down 79%, so it can't possibly fall any further. It absolutely can.

I'm interested because we're looking at an extreme situation in one of the most successful companies of our lifetime.

And there's a very simple number that can help us decide what to do about it.

$40

Here's the best part. We don't have to guess.

Nike closed Friday at $37.08. The level I'm watching is $40. That's right around the average price Nike shares have traded at since those 2000 lows.

Below $40, I don't need to do anything. Let it fall.

But if Nike can get back above $40 and stay there?

Now you've got my attention.

Think about what we'd have.

One of the most famous companies in the world, down 79% from its highs, trading at its lowest level in a decade, testing a long-term price level that has rarely been touched in 25 years, and then potentially getting back above it.

That's the kind of setup where I'm willing to take a stab.

And notice what I'm not doing. I'm not trying to figure out whether the newest Air Jordans are cool. I'm not interviewing teenagers at the mall. I'm not predicting Nike's sales in China.

And I'm definitely not buying the stock just because it used to trade at $179.

Stocks don't care where they used to trade.

I'm waiting for the market to give us evidence that something’s changed. $40 is that line for me.

Remember what that line represents. It's roughly the average price Nike investors have paid since the 2000 lows. When Nike is above it, the average buyer is making money.

And when the average buyer is making money, good things tend to happen.

People aren't trapped waiting to get their money back. There's less pressure to sell every rally.

And most importantly, it tells us that buyers are finally taking back control.

That's what I want to see here.

If Nike can't get above $40, there is no trade. If it gets above $40 and holds, then we can buy it knowing exactly where we're wrong.

That's how I like my trades. Simple.

Nike has already done the hard part. It fell 79%.

Now I just need it to do one more thing.

Just do $40.