No no no, I don’t mean buying the physical shoes but the stocks of the two companies.
Let’s take a look at the comparison in terms of numbers: (Numbers may be adjusted as averages)
Nike is obviously a much bigger company in terms of market capitalization. To a large extent, many people will also agree with me that Nike has a much stronger brand name and brand equity which allows it to command a higher price for its products. In investment lingo, Nike is deemed to have a strong brand economic moat.
This translates into better financial performance for Nike too as you can see from the above table. Nike being a much bigger organization, however, has a slower revenue growth compared to Sketchers.
We probably can make a simple conclusion that Nike is a wonderful company.
Does this mean that you should go ahead and buy Nike now? After all, Warren Buffett said “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. There lies one key word fair. Is Nike fairly priced now? Let’s just look at its current PE of 32.3 and forward PE of 26.6, I won’t exactly say it is cheap. I would definitely have Nike in my shopping list when it is on sale though.
How about Sketchers?
Doing a quick PhD Fundamental Analysis method taught in our class Cashflow Mastery Program, we determine:
FCF/Revenue: 9%, Net Margin: 6%, ROE: 15%, ROA: 10%
I definitely don’t quite like the low net margin.
Looking at debt/equity, interest coverage and cash position, Sketchers definitely has a very good balance sheet with no debt.
Sketchers is growing revenue and EPS in the mid teen figures. We estimate the fair value to be about $32 per share.
Sketchers closed at $29.43 as at 5th June 2019. Using fair value of $32, it is currently undervalued with a 9% margin of safety. Would I go ahead and buy the stock and would you?
I like Sketchers in many aspects and I am even biased perhaps because I have so far bought 4 pairs of their shoes as I find the shoes light and very comfortable to wear. Nevertheless, Sketchers is not an ideal stock for me to own in the long term in terms of risk-reward, long-term growth potential and the key financial performance metrics. Alibaba, Facebook and Apple would meet my criteria.
Having said so, I do use options strategies on Sketchers and other companies. I have initiated a cash-protected sell put on Sketchers with strike price of $28, expiring 21 June 2019. The premium was $1 when I did the trade, translating into 3.57% or 42.84% annualized. If the price drops below $28, I would either roll down to a lower strike price or just pick up the stock, knowing that it is not a bad stock and slightly undervalued. This is a strategy that I use to generate monthly income. Using this strategy alone, I average a few thousand dollars of income per month.
If you would like to know more about what we do to profit from the stock market in the long term through value investing and how we generate monthly income through selected options strategies, do not miss our free masterclass on 11th and 13 June. You can sign up here.
At Journey With Money, we are practitioners of Value Investing for Singapore and US stocks. We are passionate about sharing our Stock Investment knowledge and experience but the materials we present do not constitute stock recommendations and readers are urged to do their own due diligence for any investment decisions.
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