I get it. No one wants to touch retail stocks today, amid a global pandemic which has shut down physical stores and killed consumer spending. It’s no wonder that Nordstrom (NYSE:JWN) stock has been such a big loser in 2020, falling 64% year-to-date to its lowest levels since the 2008/09 Financial Crisis.
But, sometimes, buying stocks everyone else is selling pays off in a big way in financial markets.
Look no further than the entire stock market back in March for proof of this. Everyone was selling everything because Covid-19 was supposed to end the world. But it didn’t. And those brave investors who bought the dip back in March have made big profits. After all, the S&P 500 just had its best 100-day rally ever.
I think we have a similar situation with JWN stock.
Everyone is selling Nordstrom stock today. But brave investors who buy the dip amid recent weakness will make big profits over the next 6 to 12 months.
Covid-19 Fears Abating
The very catalyst which killed Nordstrom’s sales, profits and stock price in 2020 — economic fallout from the Covid-19 pandemic — is now starting to abate.
Over the past several months, U.S consumers, businesses and legislators have increasingly mastered the Covid-19 balancing act, wherein we are sustaining quasi-normal economic and social normalcy while keeping virus transmission relatively muted, by wearing masks, social distancing, converting curbside parking into outdoor restaurant seating, putting gyms in parking lots and re-purposing streets and neighborhoods into open air markets.
It’s the best of both worlds.
As a society, we will only get better and better at this balancing act over the next few months. As we do, economic activity — and consumer spending — will continue to recover, while Covid-19 cases will continue to drop.
Accelerating the transition back to “normal” will be a Covid-19 vaccine in late 2020 or early 2021. While this vaccine will not be a panacea for the virus, it will dramatically increase consumer confidence in public health safety and likely accelerate consumer behavior normalization.
Thus, over the next 12+ months, U.S. consumer spending at places like Nordstrom will likely recover at a very healthy pace.
Of course, that’s a huge tailwind for JWN stock.
Strong Competitive Positioning
It’s important to recognize that Nordstrom is a differentiated company in the troubled mall retail sector, with tangible and reliable brand equity.
Specifically, Nordstrom has crafted a niche for itself as a go-to, all-in-one seller of premium product to affluent customers. This is not a Macy’s (NYSE:M). Or a J.C. Penney. Both of which are commoditized, low-end retailers whose customers only shop their for price.
Rather, this is a high-end, premium retailer with a loyal and sticky customer base that values Nordstrom for things outside of price, including store presentation and product selection — two things which comprise a viable competitive moat for the mall retailer, and help establish reliable brand equity. Nordstrom has leveraged that differentiated brand equity to gain high-quality exposure to the off-price channel via Nordstrom Rack, too (which is important because the off-price shopping channel has been booming).
At the same time, Nordstrom’s geographic footprint isn’t too big, at just ~100 full-price stores and ~250 off-price stores. Thus, while peers are having to focus their efforts on right-sizing their real estate and have bloated capex bases, Nordstrom is able to focus its investments into improving its existing store bases and building out a robust omni-channel business.
To that end, Nordstrom’s omni-channel business is one of the strongest in the sector. According to Morningstar, about 50% of Nordstrom’s first-half 2020 sales came from the online channel, while management commented that pick-up orders now represent 15% of Nordstrom.com sales (thanks to the roll-out of curbside pick-up in Q2).
All in all, Nordstrom will not go the way of Macy’s, J.C. Penney or Sears. This is a differentiated mall retailer with much stronger fundamentals and much brighter future growth prospects.
Market Share Gains in 2021/22
Because many of Nordstrom’s peers are going under amid the Covid-19 pandemic — while Nordstrom is not — the mall retailer has a compelling opportunity to gain high-quality mall retail market share over the next several years.
If you know anything about the mall business, you know that the concept of the mall isn’t going away anytime soon, as pundits would have you believe. Instead, the mall concept is just changing, from “shopping only” to “shopping, eating and playing”.
Specifically, low-end malls are closing down, while high-end, Class A malls are reinventing themselves as physical experience-driven destinations, with a mix of retail shops, gyms, movie theaters, restaurants, arcades and cafes.
Sure, demand for those things today is depressed. It won’t be forever. As soon as Covid-19 health risks abate, consumer thirst for physical experiences like dining and watching movies out will translate into strong traffic trends at multi-purpose, Class A malls.
All of Nordstrom’s full-price stores are in Class A malls or urban centers.
It doesn’t take a rocket scientist to connect the dots. Nordstrom will, over the next few years, grow market share in still highly-trafficked Class A malls, which will enable the company to sustainably grow sales, margins and profits.
As all that happens, JWN stock will rebound.
Dirt Cheap Valuation for Nordstrom Stock
Today, largely because of the Covid-19 crisis, Nordstrom stock is as cheap as its been ever.
JWN is currently trading at 0.2-times trailing sales. Last year, the stock’s sales multiple averaged about double that, around 0.4. In 2018, it averaged around 0.5. From 2010 to 2015, JWN stock consistently traded around 1-times sales.
This dirt cheap valuation on JWN stock exists today only because Nordstrom’s sales, margins and profits are being significantly depressed by Covid-19.
This won’t last forever.
For all the reasons outlined above, Nordstrom’s sales, margins and profits will recover from today’s depressed levels back to pre-Covid levels over the next 12 to 24 months. As they do, JWN stock will return to pre-Covid valuation levels, too.
Does that mean JWN stock could double from here?
Absolutely. Over the next 12 months, it’s very easy to see Nordstrom’s sales improve and the sales multiple expand towards 0.4, a combination which broadly implies more than 100% upside potential for this beaten-up stock.
Bottom Line on JWN Stock
Nordstrom stock is down. But not out.
It takes guts to buy JWN stock today. Amid a pandemic. With sales plunging. And profits getting wiped out.
But I think big bravery will be rewarded with big profits, as economic and consumer behavior normalization over the next 12 to 24 months sparks a potential 100%-plus rally in JWN stock.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not own a position in any of the aforementioned securities.