Make 67% as Investors Abandon This Market Darling

Companies spend billions to build their brands. They buy sponsorship deals with celebrities, donate to causes and direct commercials that reinforce their desired image.

Successful brand management can evoke emotions like joy or pride, and it can allow a company to charge a premium for its products. Consumers may overlook the fact that there isn't much separating a company's product from its competitors' and buy the one with the better perceived image, even if it costs more.

A similar phenomenon occurs in the investing world as well. Whether it's a focus on past returns or the company's image, investors may start to overlook fundamentals and just keep chasing a stock despite higher and higher prices.

While a good brand can carry a company's products for decades, investor enthusiasm typically doesn't last so long. A market darling may only have a few years before slowing fundamentals or a new competitor start to weaken investor perception. When that happens, it takes very little for the bottom to drop out as investors head for the exits.

And that's what appears to be happening with today's stock. The company has one of the strongest brands on the planet, which has helped its stock soar roughly 500% since the bottom of the financial crisis. But many investors seem to be ignoring three straight quarters of missed sales, with shares of the company trading at a premium to its competitors. Plus, one of those competitors is seriously encroaching on the company's turf with massive sales growth.

I have a feeling it won't be long before this market darling loses its invincible image. We can take advantage of this with a trade that could land us a 67% profit in the next three months.

Nike Sales Falling as Another Player Rises in the Rankings

Shares of Nike (NYSE: NKE) plunged in after-hours trading on June 29 when the company missed sales expectations for the third consecutive quarter. However, shares regained their losses and even closed slightly higher the next day as investors were able to find a silver lining in earnings that were flat from the year-ago quarter.

Yet, the company has been using share buybacks to meet earnings expectations, reducing its share count by nearly 26 million over the 12 months ending in May. But share buybacks only mask problems for so long.

Part of the reason for the weak results is that Nike is facing a rising competitive threat in a very competitive market.

Red-hot Under Armour (NYSE: UA) saw footwear sales soar 95% during Q4 2015 with strong growth continuing this year. In fact, according to the latest report by SportsScanInfo, Under Armour's footwear sales surged 132% year over year in the week ending June 25.

Footwear accounted for just 17% of Under Armour's sales at the end of 2015 at around $700 million, but the company has grown to be a credible threat to larger players like Nike. For the June 25 week, Nike shoe sales grew just 4.3%, and average selling prices were down for all major brands except Adidas in a sign competition may be heating up as UA takes market share.

Beyond Nike's problem with sluggish sales and competition, the multinational company is facing serious currency headwinds. International sales accounted for 54% of total revenue in the past 12 months, with Europe accounting for the single largest region at 22% of sales. The U.S. dollar index has jumped nearly 5% since its early May lows, and this strength will likely continue to restrain Nike's revenue.

The company is expected to report earnings for the first quarter of its fiscal 2017 year in September. While earnings are projected to fall 16.4% on 5.5% sales growth, estimates for the full year are much more optimistic. Analysts expect earnings to increase 11.6% on an 8.3% rise in sales.

But sales and operating expenses have been erratic over the past few quarters, as increases in marketing to combat competition have hit both the top line and bottom line. Another quarter of missed sales would likely put a serious dent in investor enthusiasm.

If Nike's first-quarter results disappoint or management lowers guidance for the rest of the year, we could see shares drop quickly. We can take advantage of this with a simple put option strategy that can turn a 7% sell-off in shares into 67% profits.

How to Book a 67% Gain From a 7% Drop in Nike

With NKE trading for $58.50 at the time of this writing, we can buy a NKE Oct 60 Put for $3.40 per share ($340 per contract, which controls 100 shares). That is a put option with a $60 strike price that expires on Oct. 21, after the company's September earnings announcement.

The trade breaks even at $56.60 per share ($60 strike price minus $3.40 options premium), which is about 3.3% below the current price.

My downside target for NKE is $54.32, which is 7% below the recent price. Giving Nike the benefit of the doubt and assuming it meets earnings expectations for $0.56 per share in fiscal Q1, it would bring trailing earnings to $2.05 per share. At $54.32, NKE would be trading at a price-to-earnings (P/E) ratio of 26.5, which is still well above the five-year average of 24.7.

If shares hit my downside target, the put option would be worth at least $5.68 ($60 strike price minus $54.32 stock price) for a 67% gain in about three months.

This is the kind of gain that is really only possible with options. And with options, your risk is limited to the price you pay for the option -- which is significantly less than what you would pay to own or short the underlying shares.

For instance, my colleague Jared Levy, recently helped his Profit Amplifier subscribers book a 16.9% gain on a 4% drop in a popular stock, risking just $900. That may sound like it pales in comparison to our 67% projected profit for today's trade, but when you consider their trade was only open for four days, the annualized return is an amazing 1,540.6%. And that's far from Jared biggest winner.

Each week, he uses put and call options to exploit small moves in stocks to turn them into monster gains. For a short while longer, we're offering a chance to try his Profit Amplifier service for just $49 a month. This special rate will be reserved for 15 minutes when you click here.

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