Stocks of the Week!

In this email:

• Just Do it 😎…. Or Don’t 😬

• Riding the Oil Wave 🌊

Just Do it 😎…. Or Don’t 😬

“Just do it” is what they tell you. But Nike didn’t have that attitude with their latest guidance.

They announced that they’re expecting a 10% revenue decline in Q1 2025 & annual revenue to be on the decline, too.

Investors didn’t love the news & it showed.

🚨Cue a near 20% drop on the day🚨

But is the drop justified? Are the revenue projections actually that scary or are we sitting on a buying opportunity?

Let’s figure it out 🔍

First thing’s first - we need to see what the challenges are. If they’re staring at hurdles we don’t think they can jump, it doesn’t matter how big the gold medal is at the finish line if they never get there.

Hurdle number one we’ll blame on the wider market.

There’s slower consumer demand with less people lining up for fresh kicks.

That checks out ✅

In a cost of living crisis the first thing to come out of your basket are the semi-luxuries. Things you like but can live without. Most Nike products fall right in that bucket.

Maybe most importantly, this lagging growth is showing up in one of Nike’s most crucial markets - China! But this could be a temporary slump. China’s economy as a whole looks to be coming back & consumer spending is bouncing back in a few sectors. Retail spending is one of them.

Throw competing brands in the mix like UGG, Skechers, HOKA & ON & it paints a bleak picture of more competition for penny pinching consumers.

So what’s the silver lining? 🌥️ Why would we want to invest in Nike with all this going on?

*Takes a look at balance sheet*

Well, that could be a pretty good place to start…

Nike’s financial health is top tier. They’ve got an AA credit rating & sitting on a bit fat stack of cash.

$11.6 billion to be exact💰

That gives them a pretty big muscle to flex on strategic moves or acquisitions. If you can’t beat the competition, join buy them.

And I know they’re earnings have been flat-ish for the past year or two but they’re currently PE (price-to-earnings) ratio at 19 is quite sexy. Historical average sits at 24.3 so there’s room for growth here. 📈

A 2% dividend yield isn’t awful, either. And it’s well covered so no fear of it going away. Plus, Nike have been slowing back their shares. Share count has reduced by over 13% in the last decade.

Less shares = less supply = higher share price (assuming the demand for shares remains constant or increases)

To back all this up, Nike is refocusing on its core strengths – innovation, performance products & wholesale business.

They had a brief go at scaling direct-to-consumer & quickly found out retailing isn’t the same as branding & manufacturing so pivoted back to what they do best.

Strides are being made in the fitness market, particularly targeting female consumers, which is showing strong growth. Could be thanks to the presence they’re building in the WNBA, cutting deals with athletes like Caitlin Clark.

Remember China? They’re taking the same approach there, too & getting their products on the bodies of top Chinese athletes.

Say what you like about Nike but they sure do know how to make strong brand associations

All things considered, I think Nike are facing temporary headwinds that they’re equipped to deal with. I don’t want to bet against a company that’s had an 11% CAGR (Compound Annual Growth Rate) & 11 years of consecutive growth.

In fact, I’ll bet on them & take advantage of the discount with a small position. Even with a conservatively optimistic view, there’s about a 35% upside. If we reach old highs, you’re look at a 135% gain.🚀

Riding the Oil Wave 🌊

If a stock was up 94% in the last 12 months would you think you’d missed the boat?

That’s exactly what Scorpio Tankers (STNG) has gained & I still think we can make a buck from it.

So who are Scorpio Tankers? And what do they do? 🤨

In short, they move oil products around the world using big, modern ships.

Scorpio Tankers had a super strong Q1 for 2024 that’s caught my attention.

“What made it so interesting?”  you ask?

Paying down debt, reducing operating costs per vessel, and riding the wave of high contract prices in the energy transport sector.

All things you love to see. 😍

They're expecting these high prices to stick around too, which is great news for future earnings.

The excitement doesn’t stop there. Scorpio recently repurchased 641,654 shares on the open market at an average of $78.26 each. This buyback follows a massive $490M of stock buybacks in 2023 but is the first since last fall.

That’s testament to their strategy to reduce net debt to around $810M. And that numbers important because it’s the approximate scrap value of their fleet. 💰🔄

The fleet is currently at 109 vessels, making them a big player in the oil transportation business. They don’t just have a lot of ships, they’re also quite new. Average is only 8.2 years old & all state of the art to meet strict environmental regulations 🌍♻️

So what’s behind their new(ish) found success?

Well, there’s a mix of geopolitical factors like the Ukraine War and disruptions in the Red Sea. That creates longer travel routes and higher contract rates (which is where they make their money). Sprinkle in the global increase in oil demand, and you’ve got a perfect recipe for elevated revenues. *Chefs Kiss*

Just to really drive home the growth they’re seeing here’s a snapshot of Scorpio Tankers Q1’24 report:

- Revenues: $391.3 million (up 1.8% YoY, 16.3% QoQ)

- Gross Profit: $311.6 million (up 2.7% YoY, 24.6% QoQ)

- Net Income: $214.2 million (up 10.8% YoY, 77.1% QoQ)

They also made a hefty $262 million in debt repayments and are planning more in Q2-2024. Lower debt means lower operating costs. Lower operating costs means higher profits down the line.

And we’re still not done yet!

For Q2 the vessels are already raking in more cash than analysts had even modeled for so we should be in for another juicy earnings report.

Even with the huge rally over the last 12 months, the stock is still undervalued. Scorpio Tankers is trading below its Net Asset Value (NAV) per share. That means if the company shut up shop today & sold everything it owned & paid all it’s debts, the money left over would be more than what you currently buy the company at.

It’s like buying a bank account with $100 in it for $80.

You’d make that trade all day, right?

Good! Me too!

Now just like all things investing, Scorpio Tankers isn't without risk. Market volatility & changes in global oil conditions could impact stock prices. But with their current financial health & strategic debt reduction, Scorpio Tankers is well worth a small part of my portfolio.

And there’s a near 2% dividend yield! Count me in.

That’s all! See you same time next week 👋 

P.S Hit reply & let me know what you thought of this weeks newsletter. All feedback is welcomed ❤️