Free Nike

By John Del Vecchio  |  July 10, 2019

Another week, another unicorn…

“What’s a unicorn?” you ask. Well, it’s a pre-initial public offering startup with a valuation greater than $1 billion. A billion dollars is still a lot of money, even in this age of inflated asset prices.

StockX, an exchange for sneakers, recently nabbed a billion-dollar valuation. I discussed these crazy valuations in The Rich Investor last week. To recap my analysis, I compared it to the baseball card industry in the 1980s and ’90s.

In a nutshell, be prepared to lose your ass betting on shiny sneakers.

Betsy Ross Flag Nike Sneakers

Nike (NYSE: NKE) made news when it pulled a Betsy Ross flag-themed shoe released in honor of the Fourth of July holiday. You see, the shoe had an American flag from back in the 13-colony days. This offended celebrity endorser Colin Kaepernick, a former NFL quarterback, due to his belief the flag represented the days of slavery.

Of course, there was a run on those “Betsy Ross flag” Nike sneakers that did make it to market, and prices have risen considerably. Those shoes can be had for more than $3,000, with bids on eBay (Nasdaq: EBAY) as high as $15,000.

Excessive? Who knows. I do know the whole thing has gone political… and that might be the whole point.

Senate Majority Leader Mitch McConnell spoke out against Nike. Arizona’s Republican governor is pulling $1 million in state subsidies for the company. (He did show up to a holiday cookout a couple days after he made that announcement wearing Nikes…) Democrats have largely been silent.

The funny thing is, in 2018 Nike contributed three times more to Republican candidates than it did to Democrats. This makes me think that the entire thing is a ploy. We’re a bunch of suckers for making a big deal out of it.

Personally, I have no opinion about the matter. If someone wants to wear a shoe with a flag that offends others, it’s a “free speech” issue. There are no state actors here.

The Real Controversy 

What I find offensive is that the Nike shoe is trading for $2,500 to $3,000 or more. Here’s where you’re going to lose. The bid-ask spread in these markets are 15% to 20% or more. So, if the price doesn’t continue to surge by a lot, you’ll simply get eaten alive by the spread.

That’s not the trait of a liquid market. StockX’s valuation makes little sense in this context.

Back in 2012, there was a bubble around Jeremy Lin, the first American of Chinese or Taiwanese descent to make an NBA roster. “Linsanity” sparked when he suited up for the New York Knicks and had some early success.

His rookie card surged in value, fetching as much as $21,580 on eBay. Its value today? $1,300. And you have to pay $4.99 shipping.

People will always do stupid things with money. It usually involves overhyped markets. The Betsy Ross shoe is just the most recent example.

Plenty of Publicity 

Nike is benefiting from what’s called “earned media.” All the news coverage is free advertising and marketing.

And I suspect Nike did this on purpose. If so, it’s genius.

Dozens of articles have been written about the not only the controversy of the shoe but the dramatic spike in its after-market value.

Having reviewed the “comments” section of a number of such articles — and I’d rather poke my eyes out than do that again — I can assure you there just as many people out there calling for Nike boycotts because they pulled the shoe as there are who would have boycotted Nike had they released it according to a normal plan.

What’s it all mean?

Well, for NKE, over the long term, probably not much. The stock scores a solid “B” in my proprietary Forensic Accounting Stock Tracker software.

In the near term, the company is getting plenty more publicity. It just proves that, in the modern era, controversy is good.

And, of course, folks talking about your products is a net positive — especially if all the coverage is “free.”

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John Del Vecchio

John Del Vecchio is the author of the bestselling book, Rule of 72: Compound Your Money and Uncover Hidden Stock Profits and What’s Behind The Numbers: A Guide To Exposing Financial Chicanery And Avoiding Huge Losses In Your Portfolio.

As the in-house stock market guru and forensic accountant for Dent Research, John stood on the shoulders of the great David Tice, James O’Shaughnessy and Dr. Howard Schilit, and built a framework of algorithms and a multi-factor grading system that has made him one of the more successful short-sellers around.

John is also the executive editor of our Hidden Profits newsletter and our trading service Small Cap All-Stars.

He graduated Summa Cum Laude from Bryant College with a B.S. in Finance and was awarded Beta Gamma Sigma honors. He earned the right to use the Chartered Financial Analyst designation in September 2001.MORE FROM AUTHOR