For a long time, it was lonely being a bear on shares of Nordstrom (NYSE:JWN). I would know. I had been bearish on JWN stock for over five months. But, due to Nordstrom’s steady, positive comparable sales growth and healthy margins, all JWN stock price did for awhile was head higher.
Until late 2018.
The bear camp grew by leaps and bounds towards the back half of 2018 as the company’s operational risks mounted. Specifically, its comparable-sales growth weakened and its margins started to drop, while macroeconomic conditions deteriorated and its holiday sales were anemic. That combination led to JWN stock plunging from nearly $70 in early November, to just $45 today.
In other words, the market has gone from bullish to bearish on JWN stock. Meanwhile, I’ve made the opposite switch. When JWN stock was above $60, I was bearish. Now, with Nordstrom stock hovering below $50, I’m bullish.
The stock is simply undervalued and oversold at its current levels. It is both due for a near-term bounce back, and a healthy, sustainable rally towards prices above $50.
Challenges Mounted in Late 2018
In late 2018, everything went wrong for Nordstrom.
The company reported disappointing third-quarter earnings that were highlighted by slowing comparable-sales-growth trends, especially at the company’s full-price stores. The comparable-sales growth of its discount stores was still pretty healthy, but since the revenue of its off-price stores grew so much more quickly than that of its full-price stores, its gross margins weakened.
On top of gross-margin weakness, the company’s sales, general and administrative spending also bounced higher, while its EBIT margins tumbled year-over-year after being largely stable through the first two quarters of 2018.
Nordstrom’s ugly third-quarter numbers, which came at a time when the global economy was slowing, were followed by weak holiday numbers. As a result, investors worried that slower growth was the new norm for JWN stock, and that led to a bunch of selling of Nordstrom stock.
All of this sudden weakness happened when the valuation of JWN stock was relatively high. At its peak, JWN was trading at nearly 20 tines analysts’ consensus-forward-earnings estimate for the company. That’s far above the stock’s five year average forward multiple of 16, and also well above apparel retailers’ average forward multiple of 17.
In other words, expectations for JWN stock got way too high in late 2018. When the company’s Q3 numbers inevitably disappointed investors, JWN stock naturally fell by a large amount. But now that JWN stock has come down, the positioning of the shares has dramatically changed, while the company’s numbers have remained relatively stable. As a result, Nordstrom stock should rally in the foreseeable future.
The Positioning of Nordstrom Stock Has Dramatically Changed
Back in late 2018, JWN was a richly valued stock with high expectations, while the company’s growth was poised to slow. That is a recipe for disaster, and disaster is exactly what befell Nordstrom stock.
Now the set-up of JWN stock is completely different. The stock’s forward price-earnings multiple has fallen from nearly 20 to 13, which is below both the average valuation of JWN stock over the last five years and the average valuation of the retail-apparel sector.
Moreover, Nordstrom stock is 30% below its highs and is just slightly above oversold territory, according to the Relative Strength Index. The company’s growth has already slowed. Given the improving trends of the U.S. economy (including continued wage gains and the stabilization of the consumer confidence index), Nordstrom’s growth should actually stabilize, if not improve from here.
In other words, the set-up of JWN is exactly the opposite of what it was before the shares plunged. At this point, Nordstrom is an undervalued stock with low expectations that is heading into an era of potential growth acceleration. That is a recipe for success, and JWN stock will indeed be successful. I wouldn’t be surprised to see JWN stock reach $50 this month.
The Bottom Line on Nordstrom
Nordstrom is a solid company with long-term staying power in the U.S. retail sector, a sector whose growth has stabilized. As a result, JWN stock should be bought on dips and when its valuation is low. Likewise, it should be sold on rallies and when its valuation is high.
Right now, JWN stock has just weakened, and its valuation is very low. That means now is the time to get bullish on Nordstrom.
As of this writing, Luke Lango was long JWN.
