Companies with the financial firepower to resist economic turmoil are always high on investor shopping lists. Finding these stocks isn’t easy, but one with a particularly impressive track record is Nike Inc (NYQ:NKE).
Over the past five years, the company’s shares have delivered a gain of 29.1% relative to the market. Sectoral trends have undoubtedly played a part in that, but Nike’s strengths have been crucial too.
But with markets facing a host of economic uncertainties and macro pressures, the question now is whether Nike can still offer the kind of resilience that investors are looking for.
Why the top investors target quality
Elite money managers often point to company quality as a defining factor in long-term investing success. Terry Smith, the highly respected founder of Fundsmith, has said that all the clues to a good business can be found in its numbers. He cemented his formidable reputation on the basis of buying good companies, not overpaying for them and then doing nothing.
But for regular investors, what does that strategy really involve?
The answer is that quality can show up in all sorts of ways in different companies. Helpfully, there are some universal signs to look for. Truly resilient firms often have defensible competitive advantages in their markets. That means they can generate consistently high levels of profitability - no matter what the economy throws at them.
Well-defended profitability not only gives them a financial safety net, but also the flexibility to allocate capital effectively. That means deploying time, money, ideas and people to best effect. If they do it well, you’ll see it in the accounts.
In Nike's case, a huge transformation has been underway in recent years. It has been laser focused on increasing its direct-to-consumer business. That's literally meant severing relationships with many of its old distribution partners, like sports stores. In their place, Nike has built a new 'digital' culture, focusing on the relationship with its customers and dramatically increasing the desirability of its products.
In terms of numbers, the clues can typically be found in profitability measures like operating margins and return on capital employed. When these stretch into double-digits over several years, it can be a pointer to a strong, profitable business.
But of course, premium profitability can attract premium valuations, so it’s worth considering valuation and future growth too. A simple rule of thumb here…
