The Best Sports Stock to Buy in 2017

Markets Motley Fool

The sheer magnitude of the global sports industry is awe-inspiring, with some estimates placing its size as high as $1.3 trillion. This massive market -- and the companies within it that serve the billions of sports fans worldwide -- can provide investors with fertile ground from which to grow a fortune -- if you know where to look.

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The challenge, of course, is identifying the best stocks within this enormous market -- those that possess the most powerful competitive advantages and whose shares currently trade at a bargain price.

We can invest in one such business today. Read on to learn more about it.

No discussion of sports stocks can take place without proper recognition of the juggernaut that is Nike (NYSE: NKE). As the world's largest seller of athletic apparel, footwear, and equipment -- and with a brand and logo that are recognized nearly everywhere on the planet -- Nike dominates the sportswear industry.

Nike is partnered with 48 of the top 100-earning athletes, according to Forbes. To secure these sponsorship deals and others like them, Nike plans to invest more than $9.4 billion in endorsement contracts -- a staggering sum that's more than the entire market capitalization of its main rival, Under Armour (NYSE: UA) (NYSE: UAA).

Nike's massive endorsement investments have helped it become the most valuable business brand in sports, with a 2016 brand value of $27 billion -- up from $5.6 billion in 2007 -- as estimated, again, by Forbes. For comparison, Adidas (NASDAQOTH: ADDYY) came in third with $7 billion in brand power, and Under Amour placed fourth at $5.5 billion.

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Nike's trailing-12-month revenue of $33.9 billion paints a similar picture of its massive scale advantages over its rivals, as this figure is about 50% more than Adidas' sales and nearly seven times Under Armour's revenue during that time.

Better still, Nike's powerful combination of star and brand power gives it the ability to command higher prices for its goods, which in turn helps it to generate attractive gross margins and excellent returns on invested capital.

Industry headwinds

Despite Nike's dominance of the sportswear market, it has not been immune to the struggles of its retail partners. Sales of sporting goods, apparel, and footwear are increasingly migrating online, much to the chagrin of brick-and-mortar retailers. Industry giant Sports Authority declared bankruptcy in 2016, and many other traditional retailers are closing stores in response to declining traffic trends.

CEO Mark Parker touched on these trends during Nike's Q3 conference call:

The consumer has decided digital isn't just a part of the shopping experience. Digital is the foundation of it. This and other factors have shifted consumer patterns -- especially in North America -- impacting traffic, the economics of brick-and-mortar retail, and driving a more promotional environment in the near term. While we are mindful of these near-term dynamics, we remain focused on the long term. The current backdrop represents a tremendous opportunity for Nike, because the brands that win are going to be the ones that have been out in front with digital and leading with service.

To Parker's point, Nike is investing heavily in its direct-to-consumer (DTC) business, which includes the company's own retail locations and websites. In fact, DTC sales accounted for more than a quarter of Nike's total revenue in 2016, up from about 20% in 2014. Even better, Nike's online sales surged more than 50% in both 2015 and 2016 and accounted for over $1.7 billion in revenue last year. This focus on rapidly growing its e-commerce business should go a long way toward helping Nike adapt to the current -- and future -- retail environment.

Fear = opportunity

Still, investors' concerns regarding the general retail malaise has contributed to the underperformance of Nike's stock as of late, with a price that's flat over the past year even as the S&P 500 is up about 20%.

The long-term picture, however, is far different, with Nike's shares crushing the market over the past three-, five-, and 10-year periods.

Most importantly, with its stock currently trading at 22 times trailing earnings -- a reasonable price to pay for a dominant business that's grown earnings at more than 14% annually over the past half-decade -- Nike appears poised to deliver handsome rewards to shareholders in the years ahead. As such, investors may wish to use this opportunity to buy some shares of this proven long-term winner today.

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Joe Tenebruso has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.