The Dow Jones Industrial Average is made up of 30 stocks. It may come as a surprise to investors that the bottom-two performers thus far in 2018 are Nike ( NKE -4.72%) and Home Depot ( HD -3.30%), which have both been top performers over the last decade. Nike has lost 23.5% so far this year, whereas Home Depot has dropped 25.2%, as of this writing.

Consider that Home Depot and Nike have lost, on avg., 1.5% of their value each week. That’s like beginning the year with $100 and having someone take a dollar from you every three to four days. Ouch.

Despite the fact that they are currently beset by serious short-term obstacles, there are some indications that now may be a fantastic time to buy the decline on these two blue-chip stocks.

An iconic brand at the top of its game

Nike is one of the most famous and powerful companies in the world. However, in retrospect, it’s evident that its valuing got ahead of itself. Nike’s stock hit a high of $179.10 per share on November 5, 2021, giving it a market capitalization of $281 billion at the time. Its P/E ratio was 47 at that point, much higher than its 10-yr median P/S ratio of 3.1 and 10-yr median P/E ratio of 28.8.

Nike’s stock has been performing exceptionally well after dropping 28% from its record high, warranting a market capitalization of $200 billion. And it isn’t a bargain price either; its P/E and P/S ratios still remain above those 10-year median levels, and even higher than those of many of its peers.

However, the valuations of segment-leading firms may justly be greater. When considering a firm like Nike, it’s critical to distinguish the stock from the business. Nike is still pricey as a stock today, but it isn’t nearly as costly as it was in the past. However, there is no denying that Nike is at the top of its game now, sponsors many of the world’s best athletes, has never been stronger in terms of brand image or faster in terms of growth.

Nike notched a record-high revenue and net profit in 2021. Its true standout number, however, was its operating margin of 15.6%, which is the highest since Nike was a much smaller firm in 1993.

Nike’s margins may have been slightly reduced, but the company has a long history of growing top and bottom lines amid inflation. However, it remains to be seen if the company can maintain its high margins and expand its top and bottom lines in an inflationary period. The long-term expectation for Nike stock ownership is more solid than ever.

A slower housing market could negatively impact Home Depot

Home Depot is the gold standard in its field, as Nike is in its. The stock has been an outperformer for a long time, with a 10-year return of more than 500% despite recent fluctuations. When the COVID-19 epidemic hit its peak, Home Depot’s performance rose significantly during the white-hot housing market and an increase in DIY home improvement projects.

However, there is evidence that the housing sector is about to slow. And because of this, investors are concerned about Home Depot stock right now.

The combination of these two factors has pushed up the 30-year fixed mortgage interest rate to an all-time high of 4.7 percent, which is a three-year high. It’s not that a 4.7 percent 30-year mortgage interest rate is exceptionally high in comparison to historical norms. It’s just that mortgage rates are no longer cheap, and housing prices are still impossibly expensive.

The housing sector has been doing great for years now, and it has gotten even stronger following the collapse of mortgage interest rates during the pandemic’s height. However, with house values and mortgage interest rates at present high levels, we might start to observe a shortage of supply outpace demand, causing prices to fall.

Regardless, the current situation for housing is unquestionably dismal. And investors’ optimism for Home Depot has taken a hit as a result. It wouldn’t be surprising if the stock dropped even further. In many respects, it makes sense that the company’s shares have fallen 25% year to date. However, it’s just as difficult to imagine a world in which Home Depot’s stock isn’t considerably higher 10 to 20 years from now than it is today.

Author: Scott Dowdy

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