Nike Stock Among 2023 “Highest Conviction” Picks By UBS Ahead Of Quarterly Results

Analyst chatter has been mostly positive for Nike stock ahead of the company’s earnings report on Tuesday.

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Deutsche Bank on Thursday lifted Nike‘s (NKE) price target to 126 from 99. Telsey Advisory Group on Wednesday maintained an outperform rating for Nike and lifted its price target to 130. UBS, meanwhile, 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 stock Thursday after Goldman Sachs downgraded group peer Western Digital (WDC) to sell from neutral. Goldman also lowered WDC’s price target to 31 from 43.

Last month, Micron cut its production target for memory chips by about 20% for the current quarter. In August, it issued a revenue warning, one day after Nvidia (NVDA) warned of softness in its gaming business.

Micron reports Wednesday after the close. With the stock close to 50% off its high, a lot of bad news has been priced into the stock already. But MU stock is still in a downtrend, hurt by repeated signs of institutional selling that have knocked its Accumulation/Distribution Rating down to D-.

Nike Stock Climbs Off Lows

Nike sold off 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 jumped 65%.

At the time, Nike said it expects gross profit margin in its current fiscal year ending in May to fall 200 to 250 basis points vs. a prior estimate of flat to down 50 basis points.

One bright spot in the report was that revenue in North America jumped 13% to $5.5 billion. Nike said demand remains strong in North America despite rampant inflation.

China revenue dropped 16% to $1.7 billion, hurt in part by Covid lockdowns.

Results from the sneaker giant are due Tuesday after the close. The Zacks consensus estimate is for adjusted profit of 65 cents a share, down 22%. Revenue growth is expected to accelerate for the second straight quarter, up 11% to $12.6 billion.

Nike stock has rallied off lows, but it’s getting some resistance now at its 200-day moving average, just like the S&P 500 is.

GIS, CTAS, TTC Set To Report

Uniform maker Cintas has been an outstanding price performer in the stock market. But the stock fell through its 21-day exponential moving average Thursday in heavy volume. The weakness came after a heavy-volume breakout from a shallow cup base on Nov. 10.

Cintas’ earnings have increased every year since at least 2017. For its current fiscal year 2023, profit is seen rising 12%, with 11% growth seen in 2o24. Estimates have been rising.

For the current quarter, adjusted profit is expected to rise 10% to $3.03 a share, with revenue up 11% to $2.13 billion.

General Mills and Toro have also been showing relative strength ahead of results. GIS stock closed well off lows during Thursday’s sell-off, paring a 2% loss to just 0.4%. Results are due early Tuesday.

Toro, a provider of turf maintenance equipment and services, is also showing relative strength, amid renewed strength in homebuilders, along with home-improvement chains like Home Depot (HD) and Lowe’s (LOW).

Toro reports Wednesday before the open, with strong growth expected on the bottom line and top line. Adjusted profit is expected to soar 98% to $1.11 a share. Revenue is seen jumping 24% to $1.19 billion.

Options Trading Strategy

A basic options trading strategy around earnings — using call options — allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the options trading strategy works and what a call option trade recently looked like for Nike stock.

First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Others might have already broken out and are getting support at their 10-week moving average for the first time. And a few might be trading tightly near highs and refusing to give up much ground. Avoid extended stocks that are too far past proper 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 specified price.

You earn profits when the stock falls below the strike price with a put option.

Check Strike Prices

Once you’ve identified an earnings setup for a call option, check strike prices with your online trading platform, or at cboe.com. Make sure the option is liquid, with a relatively tight 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 stock price at the 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. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.

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This options trading strategy lets you capitalize on a bullish earnings report without taking too much risk. Risk is equal to the cost of the option. If the stock gaps down on earnings, the most you can lose is the amount paid for the contract.

Nike Stock Option Trade

Here’s what a recent call option trade looked like for Nike.

When Nike stock traded around 107.90, an out-the-money weekly call option with a 108 strike price (Dec. 30 expiration) came with a premium of around $4.55 a share per contract, or 4.2% of the underlying stock price at the time.

One contract gave the holder the right to buy 100 shares of Nike stock at 108 a share. The most that could be lost was $455 — the amount paid for the 100-share contract.

When taking the premium paid into account, Nike would have to rally past 112.55 for the trade to start making 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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