Everyone is talking about Nike stock. But here’s why I think another shoe stock is a better buy

It is probably the most famous sportswear brand in the world and one of the largest footwear brands, so almost everyone already knows it Nike (NYSE:NKE). But even though everyone knows about it, it seems like suddenly everyone is talking about it.

Nike is making headlines for making a sudden and surprising CEO change. After leading the company through the pandemic, Nike decided it was time for John Donahoe to retire. In his place, Nike will retire former executive Elliott Hill.

Nike was also loudly associated with the investment of billionaire Bill Ackman. A well-known value investor has a hedge fund called Pershing Square that had investment positions in only seven companies earlier this year. But Ackman went on to work for his eighth company, investing about $275 million in Nike.

Nike could be the talk of the town. But today I prefer to invest in shares of another shoe company: Crocodiles (NASDAQ: CROX). Here’s why.

Why I like Crocs stock more than Nike stock

Crocs is a footwear company consisting of a brand of the same name and another brand called HeyDude. It may not necessarily show much growth right now – net sales in the first half of 2024 are up just 5% compared to the first half of 2023. But in terms of profit margin and investment valuation, it outperforms Nike.

Nike’s operating margin is currently around 12%, and there’s nothing wrong with that. But that’s what investors should expect – not much has changed in over a decade. Crocs’ operating margin, meanwhile, has steadily improved since CEO Andrew Rees took over in 2017. It’s currently steady at 25%, which is twice Nike’s margin.

CROX Operating Margin (TTM) data by YCharts.

When it comes to valuation, a lot has been said about how cheap Nike stock is compared to times past. And it’s true: At 23 times its earnings, Nike stock has rarely been cheaper over the past decade. This valuation may partially explain why Ackman bought the stock.

However, Nike’s shares do not have a significantly lower value than the stock exchange average S&P500as seen in the chart below. Crocs stock for contrast does they represent significant value compared to the market average as they trade at less than 11 times their earnings.

NKE PE data by YCharts.

My investment thesis for preferring Crocs stock over Nike stock is off to a good start. Crocs has better margins and pricing is cheaper.

Bringing the point to completion

Some may point out that Nike is a special situation. After all, it just hired a new CEO who knows the industry and the brand very well. This could spur Nike’s sales and send its stock price soaring.

That’s a good point. However, Nike does not guarantee this positive result. Moreover, Crocs has its own special situation that many investors overlook.

Crocs acquired HeyDude in early 2022 for $2.5 billion. Things started out well, but HeyDude’s sales have recently dropped off. Despite this headwind, Crocs continues to grow. However, management believes that it has made some mistakes that will only affect sales in the near future. According to management, HeyDude development will resume before the end of the year.

Rees recently said: “We are as confident and as enthusiastic about this brand as we were when we bought it.” Therefore, while Nike has a potential sales growth catalyst, Crocs also has one in the form of HeyDude.

There’s one more thing investors should consider. There’s a reason I mentioned Nike and Crocs stock valuations. Both companies are likely to be profitable in the long term. However, we can believe that the increase will be moderate. This makes share buybacks a bigger part of the equation for shareholders.

In short, Crocs can buy back more shares compared to Nike because its shares are cheaper. Assuming the impressive operating margin is not a fluke, Crocs management can use profits more effectively to increase shareholder value through such buybacks.

You won’t notice the difference after a quarter or two. But years later it can make a big difference. All of these things make me prefer Crocs stock over Nike right now.

Is it worth investing $1,000 in Crocs now?

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Jon Quast has positions at Crocs. The Motley Fool covers and recommends Nike. The Motley Fool recommends Crocs. The Motley Fool has a disclosure policy.