In the middle of 2024, Bill Ackman's fund, Pershing Square Capital Management, took a new stake in the iconic footwear and apparel brand Nike (NKE 0.59%). While the brand carries tremendous recognition globally, the stock is down over 31% in the last year. Nike has struggled to keep up with competition and lost some of its marketing luster that for so many years captured the attention of the sports world.

In a recent presentation, Ackman and Pershing disclosed that Nike will soon look like it's disappeared from Pershing's portfolio when the fund files updated disclosures for Q1 2025 in a few months. However, Pershing doubled down on the embattled stock.

Converting Nike shares to call options

In its investor update, Pershing disclosed that in early 2025 the fund converted its Nike equity position, valued at over $1.4 billion at the end of the fourth quarter, to deep in-the-money call options. A call option is a bullish bet that shares will reach a certain stock price, the strike, by a specific date. If the market price of the stock surpasses the strike price, Pershing will make money. Deep in-the-money call options are when the strike price on the option is significantly below the current market price, making it more likely the options will cash.

Pershing said this new structure will enable the fund to reap the potential upside and free up capital for new investments. The fact that the options are deep in the money also limits the downside potential, and the added leverage from the options makes the rewards potentially 2 times higher than owning the equity. However, if the stock somehow falls below the undisclosed strike price when the options expire, Ackman and Pershing would lose everything on the investment. More upside also comes with more risk.

Pershing also told investors that equity call options don't show up on the 13F filings that funds must file with the Securities and Exchange Commission each quarter. The next filing detailing Pershing's equity holdings will not show Nike, making the market believe the fund sold the stock. In actuality, Pershing has increased its exposure.

Nike's great turnaround will take patience

In the investor presentation, Ackman and Pershing said they believe Nike "has the potential to be one of the great large cap consumer turnarounds." Still, that turnaround is likely to require patience, as Nike has recently pulled longtime veteran Elliot Hill out of retirement to once again run the company and execute a turnaround. While Pershing thinks Hill is the ideal candidate to right the ship, much work remains.

Hill's plan is to once again place the company's primary focus on sports and reduce its focus on its lifestyle products, which face steep competition. Hill also plans to pull back from Nike Digital, which the company promoted heavily, and refocus on its relationship with its wholesale partners, a reversal of strategies the company undertook during the height of the pandemic. Management believes this renewed strategy will elevate the brand and grow the size of its potential market.

Ackman and Pershing seem partially drawn to Nike because of its brand, which will likely always hold notoriety. This is something Warren Buffett has always valued: a brand with staying power that ends up creating a moat. Ackman and Pershing also think that Nike still has a dominant position in a footwear industry that has been consolidated, providing barriers to entry. They think the company could double its margins upon a successful turnaround.

Nike stock currently trades at about 22.5 times earnings, which is below its 32.5 average dating back to 2010. However, the stock trades at 35 times forward earnings, which still seems expensive based on history. There will likely need to be further evidence of earnings growth for investors to lean in. It's certainly possible but Hill is still early in his work, so I'm not sure investors need to rush into Nike just yet.