Nike Stock Won’t Stay This Cheap Forever. How to Play Shares Now.

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May you be tanned, rested, and ready after the July 4 weekend. The rest of the month is likely to be unusually challenging.

So many major events occur in July that investor sentiment, which often tends toward the vaguely bullish, might get pushed toward a tradable extreme. Investors should remember the Five Ps—proper planning prevents poor performance—and make a plan for the month.

Already, many investors are trying to cherry-pick stocks as the major indexes have recently fallen more than 20% this year. This has led to an explosion of interest in selling put options and buying battered stocks to position for an end to the market’s prolonged weakness. But better opportunities might soon present themselves.

Second-quarter earnings season has just begun, and a hard reset of estimates and sentiment seems likely as investor prognostications about the economy will soon collide with corporate reality.

Jefferies Financial Group (ticker: JEF) and Nike (NKE) may have revealed something of the future in their recent earnings reports. The investment bank missed earnings estimates and described the second quarter as “extremely challenging.”

Nike beat earnings estimates, but a sales slowdown in North America and China battered the stock. Even news of a major stock-buyback program could not save the athletic-apparel company’s shares.

The Federal Reserve concludes a two-day meeting on July 27, which will further test and illuminate investor resolve. The entire financial world is coiled and waiting to react to the central bank’s words and actions.

The Fed’s rate-setting committee is expected to increase interest rates again by three-quarters of a percentage point. Who knows if that will be received well or not, if corporate and economic reports are worse or better than expected?

Rather than trying to make short-term directional trades on the outcomes of earnings reports—a time-honored tradition that often dominates the options market—focus on fundamentals. This is a lot less dangerous than wagering on expected sharp swings in stocks ahead of earnings reports.

Long-term investors can create a shopping list of stocks that they own and want to own more of at lower prices. They should also consider buying stocks they wanted to purchase but never did because prices were elevated for so long.

Many investors tend to approach such situations with an all-or-nothing attitude, which is fine for less erratic conditions. A more nimble approach for these times is to think about selling cash-secured puts at different strike prices to essentially create a “put ladder.”

Consider Nike. The stock is down 38% this year and trading near the bottom of its 52-week range. Yet the world loves sports and fitness, and it is hard to imagine Nike remains beaten down forever.

With the stock at $103.25, long-term investors could consider selling August $95 puts for about $2.60, September $90 puts for about $2.60, and October $85 puts for about $2.70. The trades position investors to buy shares at effective prices ranging from $82.10 to $92.10. The stock has ranged from $101.53 to $179.10 during the past 52 weeks.

Of course, if the stock remains above the strike prices at expiration, investors can keep the premiums that they received for selling the puts.

Warren Buffett once said that the key to successful investing was to be greedy when others are fearful, and fearful when others are greedy. Everyone likes to quote that phrase, though few people follow his advice. Now is a good time to start.

Originally Posted June 30, 2022 – Nike Stock Won’t Stay This Cheap Forever. How to Play Shares Now.

Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.

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