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I'm still buying this falling stock, but...
Published over 1 year ago • 4 min read
They say if you want to own a great company at a bargain price, you'll have to wait until it looks like it could be broken.
Three examples of companies that looked broken but recovered:
In 1997, Apple (AAPL) was nearly bankrupt, and its stock declined 80% before Steve Jobs returned and transformed it into one of the world's most valuable companies.
Starbucks (SBUX) in 2008 saw its stock collapse by 80% during the financial crisis but rebounded after Howard Schultz returned as CEO and refocused the business.
Microsoft (MSFT) in 2000 saw its stock fall over 60% during the dot-com crash and go nowhere for a decade before Satya Nadella transformed it into a cloud computing powerhouse.
And one that didn't:
Blockbuster dismissed Netflix (NFLX) as a niche competitor in the early 2000s, failed to adapt to streaming, and went from industry leader to bankruptcy in just a few years.
Nike (NKE) is experiencing a difficult period right now. Sales are down, profits are shrinking, and customers are not buying as many shoes as they used to.
Their stock price has fallen from around $175 at its peak to about $68 today. Social media chatter, such as StockTwits and SeekingAlpha, is overwhelmingly bearish. Commenters are even saying, "Go woke. Go broke. Then croak."
Charlie Munger said: "Everyone buying something gives 'social proof' that we think 10,000 lemmings can't be wrong."
Our brains are hard-wired to follow the herd's safety for survival, so buying when everyone else is selling is uncomfortable.
But I'm trying to focus on the advice of a famous fictional detective, Joe Friday:
Joe Friday from Dragnet
The facts tell me this is still a great company, but I'm slightly nervous about its free cash flow situation, which I will watch like a hawk.
Right now, they're only using about 41% of their free cash flow to pay dividends, which is healthy. However, analysts predict this could jump to 118% next year. That's concerning because dividends are paid with free cash flow, not accounting profits like EPS.
When a company needs more than 100% of its free cash flow for dividends, it must use savings or take on debt, which is a HUGE red flag.
Source: SimplySafeDividends.com
One bright spot is Nike's over 20% Return on Capital Employed (ROCE). This is excellent, and investors like Pulak Prasad and Terry Smith often look for this metric because it shows how efficiently a company uses its money to generate profits.
In simple terms, every dollar Nike invests in the business generates more than 20 cents in profits. That's the sign of a quality business.
I'm also encouraged by company insiders owning about 21% of Nike. That's quite high for a company this size—usually, 10-15% is considered good insider ownership.
It means management feels every win and loss just like outside shareholders do. Their interests should be aligned with ours.
Source: Finviz.com
Nike's fundamentals remain strong. It has very little debt, has paid dividends for 40 straight years without ever reducing them, and is still the world's leading athletic apparel and equipment company.
Source: Market.US
After 32 years with the company, the new CEO, Elliott Hill, knows Nike well. He's working on a comeback plan focused on creating exciting new products rather than relying on classics that are no longer selling as well.
With strong insider ownership, excellent ROCE, and a long history of success, Nike can overcome these short-term challenges—but it might take some time to get back to top form.
I'm still buying under $80, but if their free cash flow gets knocked out and stays down for the count, then I might have a very valuable (and expensive) lesson to learn about buying companies that look broken.
That's it, and I'd love for you to reply and share if you think I'm off my rocker buying Nike. I'll respond to every reply!
😁THANK YOU to all who responded to the last newsletter!!
Is this Deja Vu?! Yes... and no. Barry Ritholtz is making the rounds on a podcast book tour, and even though I shared an interview with him last week, I REALLY enjoyed this conversation with Meb Faber and I think you will too.
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Each week you'll learn how to be a better dividend investor and follow the journey of a welder with a passion for passive income to $1,000,000 and beyond.
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