Stocks for Jocks
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Jocks are not the type of people you would normally think of as being investors. Most of them are probably too busy lifting weights, running at blazing speeds, and drinking protein shakes to spend time thinking about the stock market.
But really, anyone who wants more money ought to be thinking about stocks. After all, the stock market is one of the greatest wealth building machines on the planet. If you're a jock, or have a little bit of jock in you, then these stocks may be right up your alley.
The Greek goddess of victory
This goddess was the inspiration for the name of the world's largest athletic apparel company. The original name of the company, Blue Ribbon Sports, sounds downright lame compared to Nike (NYSE: NKE). But when it comes to a company valued around $50 billion, should you, just buy it?
One of the best metrics for valuing a company is return on equity (ROE). ROE is basically a measure of how efficiently a company generates net income, relative to how much investors have placed in the firm.
An ROE figure above 20% is pretty darn good and Nike's ROE over the TTM period has been 22.23%. The figure averaged 21.49% over the past five years. Over 20% and seemingly on the rise? Things look good on the ROE front.
The management team at Nike are pretty smart guys. The man who founded the company, Phil Knight, is still the company's chairman. He has been married to the same woman for nearly 45 years and could run a mile in four minutes and ten seconds. Fidelity and the ability to work your butt off are two traits I like in a chairman.
Both CEO Mark Parker and Charles Denson, president of the Nike brand, have been with the company since 1979. Nike is led by seasoned veterans to say the least.
Its average net profit margin over the past five years has been 9.46%. That is a bit higher than the 9.24% number it posted over the last 12 months, but still places Nike head and shoulders above the competition.
NIKE recently reported its full year 2013 results and they were pretty good. Fourth quarter diluted EPS grew 27% while revenue was up 7%. How is that possible? Margin expansion and share repurchases to the tune of $1.7 billion were two big factors.
His Airness loves the comfort flex waistband
When it comes to shoes he's a NIKE man, but when it comes to underwear MJ is all about Hanesbrands (NYSE: HBI). Other than Jordan you might not think this company is all that sporty. But its most popular brand, after its flagship, is Champion sportswear.
Last year, the net profit margin at Hanes was 5.4%, well above the company's 3.8% five year average. Margins are headed in the right direction which is certainly a plus.
In terms of insider transactions the story is a little less rosy. Over the past six months insider sales of Hanes stock have outnumbered insider purchases by a tally of 13 to 1. Not necessarily a reason to dismiss Hanes completely, but investors ought to be wary when insider sales outnumber purchases by such a wide margin. The stock may not be a buy right now.
Because medieval chainmail is so passe
Another stock jocks will undoubtedly root for is Under Armour (NYSE: UA). Of the three, it would be hard to argue that the greatest growth potential doesn't belong to Under Armour. Take a look at the company's full year 2012 results and you'll see it recorded pretax profits of $203.4 million. That represents impressive year-over-year growth of 29.7%.
The company has stated that it expects to grow its operating income, another fairly reliable measure of profitability, at an average around 20% through 2016. If it can that would mean Under Armour could record an operating profit of $480 million three years from now.
I don't doubt the ability of Under Armour to continue on a massive growth streak. But even if it manages to grow at a rate that matches management's projections, in three years, it will be generating EBIT equal to 7.6% of its market cap.
Furthermore the company has increased its shares outstanding by almost 20% over the past 4 years. If that trend continues, the portion of the growth you are entitled to may very well diminish.
Foolish final take
These three American companies all have amazing brands. As the largest athletic company in the world, Nike is the strongest. Then there's Hanes, a company that's way more than just boxer briefs. Last but not least we have Under Armour, a relative newcomer on the scene that has grown at astounding rates.
If I were to buy one of these companies today, there are a few traits I'd look for. I would want the company that has the highest margins, sells at the lowest price to book ratio, and has the greatest staying power. And all those characteristics belong to Nike, and at present price levels I'd say the Greek goddess of victory is your best bet. Take a look for yourself and see if you agree.
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
Fool blogger Ryan Palmer has no positions in any of the stocks mentioned.The Motley Fool recommends shares of NIKE and Under Armour. The Motley Fool owns shares of NIKE and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.