Over the past 12 months, a $60 foam clog made its shareholders 48%.
The Swoosh lost its shareholders 45%.
Crocs Inc. (CROX) went from $83 to $123. Nike Inc. (NKE) went from $67 to $37.
If you’d been asked a year ago which brand would win, you’d have picked Nike.
Most people would.
It’s the bigger name, the better athletes and the bigger budget.
Adam O’Dell’s Green Zone Power Ratings system didn’t pick Nike. In fact, it hasn’t liked Nike all year…
First, What Happened After Our Warning
On September 25, I flagged Nike as a bearish setup going into its October 1 earnings report. The bar looked too high. Analysts at UBS and BMO expected Nike to reset its full-year outlook.
Here’s what Nike reported.
Nike actually beat on earnings, $0.48 a share against $0.43 expected. But sales fell 4%. Sales in Greater China fell 26% in local currencies. That’s worse than the 17% drop the quarter before.
Then came the reset. Nike guided to $1.15 to $1.35 a share for the full year. Wall Street had expected $1.61.
The stock fell as much as 6.6% after the bell.
We got that one right.
And the ratings say the story isn’t over…
The Ratings Never Warmed to Nike
Every week, Green Zone Power Ratings scores about 5,000 U.S. stocks from 0 to 100. It grades each one on six factors: momentum, value, quality, growth, volatility and size. The higher the score, the more of the market a stock beats.
Here’s what a year of scores looks like for these two.
A year ago, Nike scored 16. In January, it scored 10. By April, it hit 6.
It got a lift to 20 in July. That was the best it did all year. It has slipped again since.
Think about that. A score of 20 means 80% of the market rated better. Nike’s best day all year was a failing grade.
Crocs took a bumpier road. It scored 32 a year ago and 57 in January. Then it slid to 22 in April. By July, it was back to 49.
Here’s the interesting part.
Since July, Crocs stock has actually slipped, from about $137 to $123. But its score kept climbing. Crocs raised its profit outlook while its price got cheaper. The ratings liked that combination.
Crocs Wins On All Six Factors
Here’s how the two stack up today.
Start with the closest race.
Nike scores 84 on quality. That’s a good grade. The company still earns real returns and carries manageable debt.
So the ratings aren’t saying Nike is a bad business. They’re saying it’s a bad stock right now.
Everywhere else, it’s a rout.
On momentum, Crocs scores 77. Nike scores 1.
Only 1% of the market has worse price trends than Nike.
On growth, Crocs scores 56. Nike scores 11.
On value, Crocs scores 89. Nike scores 53.
And here’s the one that should surprise you.
On volatility, Nike scores 20. Crocs scores 52.
In essence, the blue chip is now the stock that swings harder.
One Brand’s Profits Are Growing… The Other Is Shrinking
Here’s the simplest way to see the gap. Look at what you pay for each dollar of this year’s expected profit.
Crocs costs about 9 times its expected earnings. Nike costs about 30 times. Crocs expects to earn $13.70 to $14.00 a share this year. It raised that outlook in August.
Nike expects $1.15 to $1.35. It cut that outlook in October.
At $123, Crocs trades at about 9 times the midpoint. At $37, Nike trades at about 30 times.
Crocs is growing its earnings. Nike’s are shrinking. Nike earned about $2.09 a share over the past year. Its new guidance points to about $1.25. That’s a 40% drop.
Crocs is buying back its own stock. It spent $251 million on buybacks last quarter. The board just added $1.5 billion to the program. That leaves about $2 billion, roughly a third of the company’s market value.
The Dividend Trap, and Not All Is Perfect
Now, I know what some Nike owners are thinking. At least I get paid to wait.
Nike yields 4.4%. Crocs pays no dividend.
But look closer.
Nike pays $1.64 a share a year. It now expects to earn $1.15 to $1.35. That means Nike is paying out more than it expects to earn.
A company can do that for a while. It can’t do it forever. A 4.4% yield on a stock down 45% isn’t a reward. It’s a warning light.
That doesn’t mean Crocs is perfect either…
Its HEYDUDE brand is still shrinking. HEYDUDE sales fell 5.7% last quarter. Crocs’ profit margins slipped, too.
And look at that bumpy line on the ratings chart. Crocs has rated well before and then slipped. In April, it scored 22.
There’s also a near-term test.
Crocs reports third-quarter results on October 29. The stock fell after its last report, even though Crocs beat and raised its outlook.
What To Do Now
If you own Nike, don’t let the brand or the dividend keep you in. Nike’s Investor Day is November 16 to November 17. That’s where management says it will lay out “the next phase of our growth strategy.” Until the ratings improve, the Swoosh is a story stock, not a ratings stock.
If you want a footwear stock, Green Zone Power Ratings says Crocs. If you don’t want to hold through earnings, wait until October 30, after the report, to buy.
And remember the bigger lesson. The brand you know best isn’t always the stock you should own.
Until next time…
Safe trading,
Matt Clark, CMSA®
Chief Research Analyst, What My System Says Today
