Billionaires Bill Ackman and Jeff Yass are piling into these troubled retail stocks. Here’s why it can be a smart move.

Portfolio managers Bill Ackman and Jeff Yass have little in common. Ackman is one activist investor who takes large positions in a small cohort of stocks. His fund, Pershing Square Capital Management, manages more than $10 billion across just nine positions. Yass, on the other hand, helps manage Susquehanna International Group (SIG) – a $57 billion fund with more than 5,500 positions.

While browsing the most recent 13F applications I noticed something interesting for Pershing Square and SIG. Last quarter, Ackman’s fund took a new position in the shoe and clothing company Nike (NKE -1.05%). Meanwhile, SIG – which already had a stake in Nike – increased its position in the stock by 943%, buying almost 5.5 million shares.

At first glance, these purchases seem questionable. Nike stock has plunged 27% so far in 2024, making it one of the worst performing companies in the world. Dow Jones Industrial Average.

Let’s take a look at what’s happening at Nike and assess why Ackman and Yass might be interested in the stock. After a thorough analysis, investors may come to the conclusion that Nike presents an interesting and potentially lucrative opportunity right now.

What’s going on with Nike?

The chart below paints a pretty interesting picture for Nike. Over the past ten years, the company has managed to grow sales and profits significantly. However, in recent years, Nike’s sales and profitability have suffered a noticeable slowdown. While consumer durables shopping patterns have certainly been affected by inflation and a high interest rate environment in recent years, Nike’s problems are much more nuanced.

NKE income (annual) data Ygraphs.

In recent years, Nike has adopted a new distribution strategy, removing its products from several physical stores and opting to double down on its digital-first approach. In theory, this decision makes a lot of sense. By cutting out third parties and marketing directly to customers through its own website and app, Nike hoped to lower its cost profile while generating more margin among its customers, making its economy more efficient.

Unfortunately, this strategy did not work out as management had hoped. In a way, Nike has unintentionally caused his brand to be overshadowed by other shoe and apparel manufacturers after removing their products from several major retail distributors. This has caused Nike to lose touch with consumers, particularly with younger demographics who have shown some preference over other footwear companies such as Crocs, Birkenstock, When holdingAnd All birds.

Given the hiccups in Nike’s strategy and the headwinds this has caused the company financially, I wasn’t surprised to see the company parted ways with CEO John Donahoe last month.

A look at Nike’s valuation

In my opinion, properly valuing Nike stock is a particularly challenging exercise. The appointment of a new CEO almost certainly means that changes are coming. Whether it’s its core business, its organizational structure, or its marketing campaigns, I think it’s fair to assume that Nike is going through a bit of a rough patch. turnaround at this moment. All these parameters make it difficult to accurately predict Nike’s growth in the coming years, as I suspect many of the changes brought by the new management will take some time to bear fruit.

NKE PE ratio (forward) data Ygraphs.

The chart above shows trends in Nike’s forwards price-earnings ratio (P/E) multiple of the past year. While there have been some obvious ebbs and flows in Nike’s valuation, I would point out that Nike’s current price-to-earnings ratio is essentially back to where it was twelve months ago.

Could investing in Nike stock now be a lucrative move in the long run?

Since Nike’s business is at a crossroads and there are many question marks surrounding the company’s future, I find the recovery of the company’s valuation as shown above a bit complicated. To me, it seems like investors are optimistic about the CEO transition, but they may already be pricing in some of the benefits of Nike’s turnaround into the stock.

Nevertheless, I think Ackman and Yass could be on to something. Despite its mediocre performance and increasing competition, Nike still remains one of the most recognized and valuable brands in the world.

I think Nike could come out on top in the long run, and I’m cautiously optimistic that the turnaround efforts will be executed well. However, investors should have plenty of options to invest in Nike stock at more reasonable valuations as efforts to shape the recovery take shape. For this reason, I think cautious investors should keep an eye on the stock for now.

Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Nike. The Motley Fool recommends Crocs and On Holding. The Motley Fool has one disclosure policy.