The novel coronavirus pandemic has brought about several changes to our daily lives. Apart from forcing us to shelter in our homes, it has also affected our exercise routines and fitness regiments. In mid-March, fitness stocks took a hammering, as did the broader markets. The reason was understandable.
Exercising usually involves going outside to a park or visiting a local gym. With so many people at home, fitness was likely to take a back seat.
In the first quarter, Netflix (NASDAQ:NFLX) managed to add 15.8 million subscribers, a 22 % jump year over year, and more than double the expected 7.2 million. Meanwhile, as movie movies and concerts remain off-limits, more people are turning towards video game consoles for entertainment – sales for gaming consoles grew 56% year on year in May to $235 million.
While that is all fine and dandy, it’s a worrying sign that Americans are spending more of their time in front of screens rather than in gyms. Studies show that overweight people are more at risk of contracting Covid-19 and, in some cases succumbing to it. That should be incentive enough for us all to maintain a strict fitness regimen.
There are some bright spots here, though. Major fitness apparel companies are reporting a massive spike in online sales numbers, so you know that people understand that they need to get fitter. That is reflected in the share prices of these companies, a phenomenon that will continue. Fitness stocks, therefore, offer a unique opportunity to capitalize on this trend.
The three fitness stocks to keep your eye on are:
Fitness Stocks to Buy: Lululemon Athletica (LULU)
Companies that have successfully adopted an e-commerce model are flourishing due to our “new normal” post-Covid-19. One of the most successful companies to pivot their strategy to a more commerce-based one is Lululemon Athletica.
At a market cap of $41.6 billion, the retail company is somewhat of a giant. It is well-led, has great fundamental value, and operates a direct-to-consumer business model. It’s also important to note that the company’s decision to acquire home fitness instructor Mirror in a $500 million cash deal will help in growing its e-commerce platform.
Both these companies have a strong history of cooperation, and the agreement comes at a time when Mirror’s services are seeing increased traffic due to strict work-from-home regulations.
In 2019, sales increased by 21% to $4 billion, double the amount earned in 2014-2015. If that was not impressive enough, e-commerce sales increased by 67% in Q1, in comparison to the year-ago period. This number becomes even more telling when pitched against the backdrop of a 17% decline in net revenue. An active e-commerce sales channel is something every company wants at the moment. The fact that Lululemon is more of a digital player with a few stores will help the company moving forward.
However, I must say that LULU stock is trading at historical multiples, which may put people off. At the time of this writing, LULU stock trades at 72x price-earnings ratio. Although I like the company, that seems too high. I would suggest investors waiting for a more attractive entry point.
Nike (NKE)
If you’re looking for a stable, secure fitness company among the smorgasbord of fitness stocks, look no further than Nike. In March, panic-induced selling led to shares hitting a 52-week low of $60. Since that time, NKE stock has made up a lot of lost ground and is now trading at a premium price point.
The best thing Nike has going for it is its brand name. I challenge you to find a name that is more well known around the world. There are just a handful of companies that have this kind of brand recognition. Coca-Cola (NYSE:KO), McDonald’s (NYSE:MCD), and Walt Disney (NYSE:DIS); you just have to say the name and people know what you are talking about.
In a sign of the times, Nike saw digital revenues grow by 79%, surpassing $1 billion in annual digital revenue in Greater China and EMEA each. Overall though, the company’s brands did see a drop in revenue due to the prevailing Covid-19 situation, but that was expected.
The one exception was Air Jordans, which saw sales growth of 15%. You can put some of that down to ESPN’s excellent documentary The Last Dance, which chronicles the life of Michael Jordan and his illustrious career with the Chicago Bulls.
Nike is an extremely valuable company that has pretty much weathered this crisis successfully. You cannot go wrong investing in this one.
Under Armour (UAA)
Out of all the fitness stocks, Under Armour is perhaps the most exciting at the moment. Analysts have priced in the recovery for several companies on this list, but that does not include UA. Year-to-date, shares of the apparel company, are down almost 50% and they took a severe hit after the company reported a 23% drop in revenues to $930 million in Q1.
While other apparel makers on this list are seeing massive digital sales, the same cannot be said for Under Armour, which continues to struggle because of a business model that relies more on wholesale revenue as opposed to e-commerce. That’s not great, especially with so many states still operating under strict social distancing rules.
Under Armour remains heavily reliant on retail stores reopening. Until that happens, markets will continue to be unkind towards UA stock. However, I believe shares offer an attractive entry point that may not be available for in the foreseeable future.
UA stock trades at 1.5x forward enterprise value-sales, while NKE trades at 4x. Any way you slice it, it’s a steal at this time.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.
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August 05, 2020 at 01:35AM
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