Billionaires Bill Ackman and Jeff Yass are pouring into the battered retail industry. Here’s why it might be a smart move.

Portfolio managers Bill Ackman and Jeff Yass have very little in common. Akman is activist investor which has large positions in a small group of stocks. His fund, Pershing Square Capital Management, manages more than $10 billion across just nine positions. Yass, by contrast, helps manage Susquehanna International Group (SIG), a $57 billion fund with more than 5,500 positions.

Browsing the most recent 13F documents around Pershing Square and SIG I noticed something interesting. Last quarter, Ackman’s fund took a new position in the footwear and apparel company. Nike (NKE -1.39%). 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 look dubious. Nike shares are down 27% in 2024, making it one of the worst performing companies in the world. Dow Jones Industrial Average.

Let’s dive deeper into what’s going on at Nike and evaluate why Ackman and Yass might be interested in the stock. After careful analysis, investors may conclude that Nike already has the makings of an interesting and potentially profitable opportunity.

What’s going on with Nike?

The chart below paints a pretty interesting picture for Nike. Over the past decade, the company has managed to significantly increase revenue and profit. However, Nike’s sales and profitability have experienced a noticeable slowdown in recent years. While consumer purchasing patterns have certainly been impacted by inflation and high interest rates over the past couple of years, Nike’s problems are much more subtle.

NKE Revenue (Annual) data on YCharts.

Over the past few years, Nike has adopted a new distribution strategy in which it has removed its products from several brick-and-mortar retail stores and decided to redouble its efforts with a digital-first approach. In theory, this solution makes a lot of sense. By removing third parties from the equation and marketing directly to customers through its own website and app, Nike hoped to lower its cost profile while increasing profits among its customers, thereby delivering more efficient unit economics.

Unfortunately, this strategy did not live up to management’s expectations. In a sense, Nike unintentionally allowed his brand to be overshadowed other shoe and apparel manufacturers following recalls of their products from several major retail distributors. This caused Nike to lose touch with consumers, especially the younger audience that had shown some favor to other shoe companies such as Crocs, Birkenstock, On holdAnd All Birds.

Given the failures in Nike’s strategy and the headwinds it has brought on the company financially, I was not surprised to see the company parted ways with CEO John Donahue last month.

A Look at Nike’s Valuation

In my opinion, properly valuing Nike stock is particularly challenging. The arrival of a new CEO almost certainly means changes are coming – be it to the core business, organizational structure or marketing campaigns. I think it’s fair to assume that Nike is going through something of a crisis. turn around at the moment. All of these variables make it difficult to accurately predict Nike’s growth over the next couple of years, as I suspect many of the changes made by new management will take some time to bear fruit.

NKE PE ratio (forward) data on YCharts.

The graph above shows Nike’s trends. price-earnings ratio (P/E) for the last year. While there have been some clear ebbs and flows in Nike’s valuation, I would like to point out that Nike’s current forward P/E ratio is essentially back to where it was 12 months ago.

Can investing in Nike stock be a profitable move in the long run?

Since Nike’s business is at a crossroads and many question marks surround the company’s future, I believe that rebuilding the company’s valuation as shown above is a bit confusing. I think investors are optimistic about the CEO change, but may already be pricing in some upside potential from Nike going public.

However, I think Ackman and Yass may be able to come up with something. Despite weak results and growing competition, Nike is still one of the most recognized and valuable brands of the world.

I think Nike can be a winner in the long run, and I’m cautiously optimistic that its efforts to turn things around will be well executed. However, investors should have ample opportunity to invest in Nike stock at a more reasonable price while efforts to turn around the economy take shape. For this reason, I think smart investors would be better off keeping an eye on the stock for now.

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