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Friday, September 21, 2007

Run With Nike


They say ‘sometimes it’s better to be lucky than good.’ That is certainly the case with my current Covered Calls Advisor Portfolio (CCAP) position in Nike.
After the market closed yesterday (Thursday), Nike announced 1st quarter ’08 earnings and they were awesome. Both top line (revenue) and bottom line (earnings) exceeded Wall Street expectations with revenue 11% above last year and earnings up 24%. Earnings were actually up by 51% when including a one-time tax benefit.

So why do I say ‘lucky’? Well, the truth of the matter is that I didn’t follow my own preferred method. I like to write near-month covered calls on companies that do not report earnings during that month -- I’ll explain the reasons why I prefer this method in detail in a post on this site at a later date. But for now suffice it to say that if I had focused on the fact that Nike was releasing their earnings prior to the Oct ’07 expiration date, then I would not have established the Nike position in the first place. So again, as they say: ‘Sometimes it’s better to be lucky than good.’

As I write this at Noon (Eastern Standard Time) on Friday, the market seems to have greeted this news in a positive, although somewhat muted way. The overall market, as measured by the Russell 3000, is up by .6% today while NKE is up 1.2% to $59.00. I’ll be considering the possibility of rolling up my Oct 55 call to either Oct 57.5 or Oct 60, but I will wait until Monday or Tuesday of next week to decide, which will allow a little more time for investors to more fully digest the earnings report and for the stock to reach a more normalized post-earnings level before deciding on the best action, if any, to take.

Further encouragement to us Nike investors was seen in the newly-presented objective stated by CEO Mark Parker on the conference call: ‘$23 billion in annual revenue by 2011’. From the $16.3 billion achieved in fiscal 2007, this would be a 9.0% compounded annual increase in revenues, which is consistent with, but also more specific than the previously stated objective of ‘high single-digit growth in revenue’. The increasing specificity by the CEO as well as the fact that he is willing to announce publicly a long-range target are both positive signs – first, in his confidence in the company’s ability to continue and accelerate their growth; and second, his willingness to set a long-range (2011) performance target. These types of actions by a CEO are very encouraging signs for us investors. Yet another encouraging sign was the recent blockbuster opening of Nike’s first store in Beijing, which initiates their China roll out plans. Also, the timing couldn’t be more fortuitous since we are now less than 1 year from the 2008 Summer Olympics in Beijing, a tremendous worldwide showcase for Nike footwear and apparel. It will take years for Nike to establish similar brand recognition and loyalty worldwide like they have established in the U.S.; but in this advisor’s opinion, chances are good that they will accomplish just that.

So, Run with Nike!

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