Bill Ackman is one of the must-watch investors of the 21st century. Ackman was an activist short seller for most of his career, but in recent years, he has transitioned to more of a long-only investor. Over the past five years, Ackman’s main fund Pershing Square Holdings has returned 28% annually from 2019 to 2023.
However, the fund has trailed the broader benchmark S&P 500 index since its inception about a decade ago, according to Barron’s. Ackman and Pershing maintain a small portfolio with less than a dozen names.
The billionaire has recently piled into a stock down over 23% in the last five years. Does Ackman know something Wall Street doesn’t? Let’s take a look.
Nike’s struggles
Ackman and Pershing launched a new stake in the iconic footwear and apparel company Nike (NKE 0.04%) in the second quarter of the year. In Q3, Pershing more than quintupled the position, now consuming 11% of Pershing’s nearly $13 billion portfolio.
Nike stock has struggled for many reasons, including weaker financials, increased competition from brands like LuluLemon, and what some say is a weak strategy and an inability to innovate. The macro-environment also impacted Nike, with price-conscious consumers electing to avoid more expensive brands.
Nike recently reported its second fiscal-quarter earnings ahead of analyst estimates, although the bar hadn’t been set very high. Even after the beat, Nike shares struggled, and several analysts trimmed their price targets for the stock after the earnings report, citing management’s decision to deal with the issues head-on, meaning a turnaround could take more time than expected.
Management attributed Nike’s issues to a lack of innovation and an inability to connect with customers. The company has been too promotional, reflecting poorly on the brand. Management guided for margins to fall during the current quarter, which includes the holiday season, and for sales to decline in the low double-digit percentile, worse than analysts had modeled.
A potential turnaround?
In September 2024, Nike rehired longtime veteran Elliott Hill as CEO. Hill retired in 2020 after a 32-year career at Nike, rising from intern to president of Nike’s consumer and marketplace division. Hill seems focused on reversing many decisions in recent years that got Nike to where it is today and getting back to basics.
This means focusing less on online revenue and more on wholesale relationships with large shoe and apparel retailers like Dick’s Sporting Goods and Foot Locker. Hill also touched on getting back in tune with the core brand, which has a deep history of providing the best apparel and athletic sneakers. Many believe this is a key reason why consumers and athletes have chosen other brands over Nike.
Analysts don’t necessarily disapprove of Nike’s plan, but it will likely require more investment and take longer to execute than initially expected. Unfortunately, most Wall Street investors consider being early to a good investment the equivalent of being wrong. However, retail investors usually invest with very different parameters than professionals.
Ackman, running a smaller and more concentrated fund, doesn’t always invest with the grain, either. He might find Nike appealing, considering it has a special brand with staying power and a strong balance sheet. The company is not overly leveraged and has plenty of cash on hand.
I would have liked to see a dividend yield higher than only 2% to compensate investors for their time, but it’s still something. Whether or not to invest in Nike depends on your timetable. I think a turnaround is in the cards, but it will not happen overnight and likely not next year, either, so there’s no need to rush into Nike. But it may be a good one to put on your watch list.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends Foot Locker. The Motley Fool has a disclosure policy.
