Analyst chatter was mostly positive for Nike stock ahead of the company’s earnings report on Tuesday.
Deutsche Bank closed on Thursday NikeTelsey Advisory Group on Wednesday maintained an outperform rating for Nike and raised its price target to 130. Meanwhile, UBS named Nike stock one of its “highest conviction” picks for 2023.
Nike headlines a quiet week of earnings along with General Mills (GIS), Cintas (CTAS), Toro (TTC) and micron (MU).
Sentiment was negative in Micron shares on Thursday after Goldman Sachs downgraded group mate Western Digital (WDC) to sell from neutral. Goldman also lowered WDC’s price target from 43 to 31.
Last month, Micron lowered its memory chip production target by about 20% for the current quarter. In August, it issued a revenue warning a day later Nvidia (NVDA) warned against softness in its gaming business.
Micron will report Wednesday after the close. With the stock down nearly 50% from its all-time high, a lot of bad news is already priced into the stock. But MU stock is still in a downtrend, hurt by repeated signs of institutional selling that have lowered its accumulation/distribution rating to D-.
Nike Stock Climbs From Lows
Nike sold hard in September after the company reported earnings and said inventories rose 44% year over year to $9.7 billion, hurt by supply chain issues. Inventory in North America was up 65%.
At the time, Nike said it expects gross profit margin to fall 200 to 250 basis points in the current fiscal year ending in May, compared to an earlier estimate of flat down 50 basis points.
One bright spot in the report was that sales in North America rose 13% to $5.5 billion. Nike said demand in North America remains strong despite rampant inflation.
Sales in China fell 16% to $1.7 billion, hurt in part by Covid lockdowns.
The results of the sneaker giant are expected Tuesday after the close. Zacks’ consensus estimate is for adjusted earnings of 65 cents per share, down 22%. Revenue growth is expected to accelerate for the second quarter in a row, up 11% to $12.6 billion.
Nike stock has rallied from the lows, but is now facing some resistance at its 200-day moving average, as has the S&P 500.
GIS, CTAS, TTC set to report
Uniform maker Cintas is an excellent price performer in the stock market. But the stock fell in heavy volume on Thursday from its 21-day exponential moving average. The weakness came after a large volume breakout from a shallow cup base on Nov. 10.
Cintas’ revenues have increased every year since at least 2017. For the current fiscal year 2023, earnings are up 12%, growing 11% in 2o24. The estimates have gone up.
For the current quarter, adjusted earnings are expected to increase 10% to $3.03 per share, with revenue up 11% to $2.13 billion.
General Mills and Toro also showed relatively strong results. GIS shares closed well from lows during Thursday’s sell-off, paring a 2% loss to just 0.4%. The results are expected early Tuesday.
Toro, a provider of turf care equipment and services, is also showing relative strength, amid renewed strength in homebuilders, along with home improvement chains such as DIY store (HD) and from Lowe (LOW).
Toro will report ahead of opening Wednesday, with strong growth expected on the bottom and top lines. Adjusted earnings are expected to increase 98% to $1.11 per share. Sales jump 24% to $1.19 billion.
Options trading strategy
A basic strategy for trading options around income – using call options – allows you to buy a stock at a predetermined price without taking on much risk. Here’s how the options trading strategy works and what a call option trade looked like recently for Nike stock.
First, identify the top-rated stocks with a bullish chart. Some may be settling into a solid base early on. Others may have already broken out and are getting support at their 10-week moving average for the first time. And a few might trade tight near highs and refuse to give up much ground. Avoid extensive supplies that are too far past the correct entry points.
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In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.
Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a certain price.
You earn a profit when the stock falls below the strike price with a put option.
Check Strike Prices
Once you have identified an income configuration for a call option, check the strike prices on your online trading platform or on cboe.com. Make sure the option is liquid, with a relatively small spread between the bid and ask.
Look for a strike price just above the underlying stock price (out of the money) and check the premium. Ideally, the premium should not exceed 4% of the underlying share price at that time. In some cases, an in-the-money strike price is OK, as long as the premium isn’t too expensive.
Choose an expiration date that fits your risk objective, but keep in mind that time is money in the options market. Short term due dates will have cheaper premiums than those further afield. Buying time in the options market incurs higher costs.
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This option trading strategy allows you to benefit from a bullish earnings report without taking too much risk. The risk is equal to the cost of the option. If inventory is less than profit, the most you can lose is the amount paid for the contract.
Trade Nike stock options
Here’s what a recent call option trade looked like for Nike.
When Nike shares traded around 107.90, an out-of-the-money weekly call option with a strike price of 108 (expiry date December 30) came with a premium of about $4.55 per share per contract, or 4.2 % of the underlying share price at that time .
One contract gave the holder the right to purchase 100 shares of Nike at 108 per share. The most that could be lost was $455 – the amount paid for the 100-share contract.
Taking into account the premium paid, Nike would need to move past 112.55 for the trade to make money (108 strike price plus $4.55 premium per contract).
Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight
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