If you ever want to see just how harmful macroeconomic exposure can be to a fundamentals, value-oriented investor, just look at the mini-tragedy involving Nike (NKE).
Click on image to zoom
At a 4.28% gain over the course of six days, this doesn’t look like much of a tragedy, but it is. After-hours on Thursday, Nike reported some jaw-dropping record numbers shortly after getting its way into the Dow Jones Industrial Average. Nike saw a record EPS of 86 cents (a year-over-year increase of 36.5%) and revenue of $7.8 billion, much higher than consensus expectations of $6.97 billion, and 7.7% year-over-year revenue growth on top of higher advanced orders. After hours on Thursday, the stock rose over 7% at one point. It gapped upwards over 5% on Friday morning.
Great news, but then the secular decline began and has continued for five days straight. From Friday morning to Wednesday afternoon, the stock has fallen around 4%. Nothing material to Nike has changed since Thursday’s phenomenal blowout–people haven’t suddenly started buying fewer Nike shoes.
But the market expects that they will. Why? The government shutdown, the budget impasse, the possibility of a U.S. credit default–all of these factors worry investors, despite Nike’s own internal success. In other words, Nike is now a victim of external factors far beyond its control, and far beyond the responsibility of Nike’s CEO or any one stockholder.
This is how systemic exposure eats into returns. The immediately obvious answer–sell right after the earnings result and take profits–isn’t very good. Where does the capital go then, to avoid effectively losing money as a cash balance? What can provide a better return than NKE? Also, what if Congress had come to a consensus, passed a budget, and Nike had gone up?
Now that the quarter is over, there may come a point where Nike gets oversold as investors fret over macro issues, providing a great buying opportunity for a buyer with patience. Late 2008 and early 2009 provided hundreds of such opportunities to patient and level-headed investors. NKE might become such a buying opportunity. It might be one already.
This is why timing the market is very hard, but it’s also why a very savvy investor can beat the market by looking for underappreciated securities and, to paraphrase Warren Buffett, profit from greediness in times of fear while remaining fearful of times of greed.