Here’s What Prompted Guinness Global Innovators to Sell Nike (NKE)

Guinness Global Innovators, an investment management company, released its fourth-quarter 2024 investor letter. A copy of the letter can be downloaded here. The fund generated a total return of 21.9% (TR in GBP) in 2024, compared to the MSCI World Net TR Index return of 20.8%. 2024 turned out to be yet another successful year for stocks. For the first time since the 1990s, the S&P 500 has now produced two years in a row with returns of more than 20% (USD). Against a complex backdrop of shifting monetary policy, geopolitical instability, and disparate regional economic performance, global equities markets produced strong returns. To get an idea of the fund's best choices for 2024, check out its top 5 positions.

In its fourth quarter 2024 investor letter, Guinness Global Innovators emphasized stocks such as NIKE, Inc. (NYSE:NKE). NIKE, Inc. (NYSE:NKE) designs, develops, and markets athletic footwear, apparel, equipment, and accessories. The one-month return of NIKE, Inc. (NYSE:NKE) was 15.37%, and its shares lost 27.53% of their value over the last 52 weeks. On March 21, 2025, NIKE, Inc. (NYSE:NKE) stock closed at $67.94 per share with a market capitalization of $100.492 billion.

Guinness Global Innovators stated the following regarding NIKE, Inc. (NYSE:NKE) in its Q4 2024 investor letter:

"We first purchased NIKE, Inc. (NYSE:NKE) in November 2016, delivering a total return of c.60% (in USD terms) over the holding period (vs MSCI World +147%). The stock outperformed strongly in first five years of the holding period, particularly during the pandemic, when global lockdowns amplified the success from the firm’s decision to focus on Direct-To-Consumer (DTC) and ‘Online’ while moving away from wholesale partners. Since then, however, it appears that these pandemic-era benefits served to mask deeper underlying issues with the strategy – in particular a declining level of competitiveness, despite the benefits to profitability. Results in July brought many of these concerns to the forefront. After no growth in FY24 and guidance for negative growth in FY25, the reacceleration of revenues investors had been patiently awaiting seemed to have been pushed still further out. The slowdown had previously been attributed to a weak economic backdrop and thus a weak consumer. Although this argument carries weight, not only do these headwinds appear deeper than expected, but there are now questions around competitiveness, in light of inroads made by competitors such as Adidas, Lululemon and On Running, and the multi-year decline in market share for Nike. In all likelihood, these firms gained share as a direct result of Nike cancelling relationships with wholesalers, which opened up shelf space for challenger brands. A marked slowdown in the ‘Lifestyle’ portfolio (i.e. nonperformance-wear, which makes up c.60% of sales) has spurred a rethink in strategy, with a complete refresh of the portfolio set to be completed by the end of FY25 (May 2025), with significant narrowing of the range underway. This quarter appeared to be a hard reset for Nike – a recognition that the current portfolio is not going to deliver the required growth. Its plan to achieve is is a refresh and refocus towards innovation (alongside greater brand and marketing investment). The foundations for Nike remain strong: it retains number-one market share across major markets, its brand equity is undoubtedly strong (even if diminished), and it has a robust supply and distribution network with strong retailer relationships and broad category exposure – all while maintaining a very strong balance sheet. Not only this, but Nike has proved over its history the ability to drive sales growth through innovation. While we acknowledge it may be able to repeat this cycle, we see increased risk to the near-to-mid term outlook and note that with a greater competitive threat and new, innovative competition, this task is all the harder to achieve. Management commentary appears to suggest that the reinvigoration of growth is not on the near-term horizon, and macro trends in the meantime are not favourable. Consumer trends change often, and Nike has often repositioned to capture them, but relying on innovation for growth appears to be a difficult sell when there is no guarantee this will flow through to real earnings. We view the firm’s problems as more than a weakening consumer environment, but a diminished ability to compete with peers, and a misstep in strategy. This could be a ‘multi-year’ reset for the firm, with no quick rebound in earnings. To summarise, although we do not rule out success in Nike’s new strategy, we have lost confidence that the stock will be able to reinvigorate growth back into the product portfolio in a desired time frame, and therefore believe there are better opportunities elsewhere."

NIKE, Inc. (NYSE:NKE) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 73 hedge fund portfolios held NIKE, Inc. (NYSE:NKE) at the end of the fourth quarter compared to 75 in the third quarter. While we acknowledge the potential of NIKE, Inc. (NYSE:NKE) as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

In another article, we discussed NIKE, Inc. (NYSE:NKE) and shared the list of companies Jim Cramer has recently talked about. In addition, please check out our hedge fund investor letters Q4 2024 page for more investor letters from hedge funds and other leading investors.

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Disclosure: None. This article is originally published at Insider Monkey.