Bill Ackman is well-known for buying large stakes in what he believes are undervalued companies and using his influence as a major shareholder to push management to make changes to unlock value.

In May, Ackman revealed that he had established two new positions in his Pershing Square hedge fund, which holds an equity portfolio valued at over $10 billion. One of those positions, Brookfield Corp, has performed well since Ackman established his position. However, the other has seen its share price decline about 15% since he first purchased around $275 million worth of shares.

Ackman’s losing bet is Nike (NYSE: NKE). If he thought it was a value earlier, he probably thinks it’s an even better value at its lower price today. Should you take the opportunity to buy shares at a better price than the billionaire?

Why Ackman decided to “Just Do It”

In Pershing Square’s semi-annual report released last month, Ackman decided to defer discussion of his latest stock purchase. But there are a few things about Nike that might make it attractive to an investor like Ackman.

First of all, Nike shares were already down nearly 50% from their all-time high (reached in 2021) when Ackman decided to invest in the company. Today, they’re down 56%.

Nike’s share price declined as the the company stumbled in its transition toward direct-to-consumer sales. The company cut ties with many wholesalers in an effort to grow its direct relationships with consumers and sell through its own stores and website. However, it mismanaged inventory, which ended up eating into its profit margins.

But management has owned the missteps, and it’s getting back on track. Nike is still the leading athletic apparel brand in the world, and that brand value gives it a lot of leeway when taking on a new strategy. That brand, an intangible asset and a source of Nike’s competitive advantage in the market, is likely another reason Ackman found the stock attractive.

Nike’s decision to cut out many of its wholesale accounts was partially influenced by the ability to control its brand messaging with its e-commerce operations, branded stores, and specialty retailers. Nike is also looking to foster brand loyalty with its membership programs, including Nike Run Club, Nike Training Club, and other digital apps.

Lastly, Nike’s committed to delivering $2 billion in cumulative cost cuts over the next three years. A more efficient operation, combined with the shift toward more direct-to-consumer sales, should lead to higher operating margin over time.

Story continues

Should you follow in Ackman’s footsteps?

The shift toward higher margin sales and operating efficiency should benefit the bottom line, but is Nike stock worth the price you’ll pay for shares today? Ackman seems to think so, likely having bought shares when they were trading well over $90 each. Today, you can buy shares for about 15% off.

A big part of that 15% drop came from a disappointing financial update released at the end of June. Sales fell 2% year over year for the fiscal 2024 fourth quarter, and management guided for a mid-single-digit decline in revenue for fiscal 2025. That’s driven by fewer product launches, reduced promotional activity, and macroeconomic uncertainty in China. That said, the company expects gross margin expansion over the next year.

Over time, sales growth should stabilize and gross margin should expand as more sales shift to digital, the Chinese market recovers, and Nike is able to exercise its brand strength and raise prices faster than the market.

Nike shares currently trade for just 25 times forward earnings estimates. It’s been years since Nike traded at a comparable level. As its operations once again reflect the strength of its brand, the company could see improved earnings growth with the potential for multiple expansion, leading to strong gains for shareholders over the long run.

Should you invest $1,000 in Nike right now?

Before you buy stock in Nike, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nike wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $729,857!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 9, 2024

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Brookfield, Brookfield Corporation, and Nike. The Motley Fool has a disclosure policy.

Billionaire Bill Ackman’s Latest $275 Million Investment Is Down 15% Since He Bought It. Should You Get In Now? was originally published by The Motley Fool