Investors are willing to pay a premium for a brand. The name brand of anything, from shoes to soda will carry a premium compared to a lesser-known or even a store brand. Companies with strong brands tend to have premiums attached to their share price too, which can make it hard to buy shares at a reasonable price.
That’s why traders should use any market volatility to focus on buying strong branded companies, as they end up being the proverbial baby thrown out with the bathwater.
That may be the case with Nike (NKE). The global shoe brand has seen shares drop over 10 percent in the past few months from an all-time high. Rising costs weighed on the firm’s recent earnings. However, analysts are starting to upgrade the stock, given the size of the pullback at this point.
With strong earnings and revenue growth over the past year, the company has gone from 52 times forward earnings to 37 times forward earnings. That’s a bit pricey for a value investor, but for the world’s leading brand in sports apparel, this may represent the best entry price for some time to come.
Action to take: Investors may like shares here, as this is a play that can work well over a long period of time. Shares yield 0.7 percent right now, hardly a huge yield, but one that has overall grown over time (just not in the past year).
For traders, a rebound looks possible here. The January $170 calls, last going for about $2.65, offer the best way to play a rebound into the start of next year.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.