Analysts Bullish on Nordstrom Despite the Stock Tanking
Nordstrom stock has been on a real tear over the last 7 months, but not the kind of tear that investors like to see. It has been beaten down so much that it looks like a real bargain to some.
Retailer Nordstrom started out the post-recession bull market in real style, where it went from below $13 in January 2009 to rise all the way to over $80 a share a little over 6 years later, in February 2015. This represents an average annual return of about 100% a year, and when you do that for a period of 6 years, that’s impressive indeed.
The wheels then came off though, and by June of 2016, a little over a year and a half later, it fell all the way to the $37 level. It has bounced around quite a bit since, and traded as high as $65 a share as recently as last October 29, but the wheels came off again since then.
Nordstrom has been absolutely terrible since, and even though stocks have generally rebounded very well in 2019, Nordstrom simply added to their losses this year, down 20% year to date. When the market has moved up about this much, and you’ve fell this much, this is a really bad sign that your stock just isn’t getting any of the love and is getting plenty of the opposite.
Whenever we measure the performance of a stock over a given period, what we’re really looking to do is to determine how competitive it is to the market, and to do this we need to compare its performance to the market’s. Nordstrom simply flunks out of school on this measure this year so far.
We need to add these two numbers together, and when we do, we see Nordstrom’s drop this year being closer to 40% than just the 20% nominal loss, and that’s what is the most troubling thing about it right now.
Hitting the Lowest Mark Since 2010 is Not Bullish
To make matters worse, the stock has just broken though the support level that we established back in 2016, where we settled in at $37.13. We went below this during this week, and while we haven’t clearly broken this support by a meaningful amount yet, this is very much in the conversation right now.
We don’t want to put too much weight into a support level that was established almost 3 years ago, as there’s a lot more that goes into these decisions than this, but the one that factors in the most is how a stock is declining, especially when it does so in the face of a market rally. Nordstrom has been going virtually straight down since April 4, when it traded at $45.64, and there hasn’t even been a meaningful interruption in this 6-week decline since, where it now sits a hair above $37.
Not surprisingly, this has excited some value side analysts, who are now crowing that Nordstrom’s very modest price-to-earnings ratio of 10 and their dividends around 4% make this an attractive buy right now.
There’s only one problem with this rationale, and it’s that if people don’t act upon this, it won’t matter at all. The success of value plays depends on two factors, the perceived value that the analysts are seeing, and this perceived value being taken up by investors enough to make this all happen.
This is clearly not the case right now though, and simply taking recommendations like this and acting upon them with no real regard to what the stock is actually doing in the market is just downright foolish actually. Still though, the analysts stick to their guns regardless, and when their predictions do not materialize, somehow, it’s the market’s fault for not picking up on it.
This involves putting the cart before the horse though, and the market is always the horse. To be successful as investors, we need to do our best to act upon what is really going on and not just our beliefs of what should be happening. When these beliefs are quite distanced from reality, as using price-to-earnings to decide future stock moves clearly is, this often leads us into far more trouble than we should be getting in to.
Nordstrom May Come Back, But This Is Not Happening Now
At some point Nordstrom may indeed rebound, and when we look at its chart, we can clearly see some of these rebounds manifest, especially after the sort of big decline that it is presently in. The big question though is when this will happen, and as we have seen, having a significantly lower P/E ratio than the market has not stopped the stock from dropping in price by 40% lately.
When a stock goes down, its P/E ratio goes down as well, so if P/E was all that influential, we wouldn’t even see declines relative to the market, and we could just arbitrage this in line with the overall market. This is not the way things play out though and we can see some real divergences here, which is a product of a stock losing its competitive advantage versus other stocks. These things do happen, and they do result in lower P/E from simply a lack of love.
Lower P/E ratios therefore not only mean that you’ll get a better return with dividends, it also means that people just aren’t as interested in the stock in spite of this benefit. Getting a 4% annual dividend won’t help much when you lose 40% in 6 months with it. This is a great example in fact of how meaningless dividends can be with common stock, and while it does impact overall return, it’s the overall return that matters, and all that matters in fact.
Nordstrom’s business fundamentals seem to be looking up lately though, although this has not translated into their stock price as of yet. Until it does, this is just idle talk really, and if we are expecting this stock to recover, we at least need to see where the bottom is, meaning that it will have to do at least some rallying before we can say anything.
In the meantime, we don’t want to be just guessing here, or hoping, that we’ve seen the bottom at $37. What we really need to see is evidence that Nordstrom will start overperforming rather than severely underperforming the market, as if it rebounds but doesn’t overperform, our money is better placed in stocks that actually are doing better.
Analysts touting this stock more now should indeed attract our attention, but not as a dividend play, as a potential total return play. The money has to start coming in first though as this is the only real way to tell where it may be headed.
Meanwhile, this remains a very ugly looking stock on the charts, and the charts tell the entire story as far as a stock’s performance goes, as that’s what charts are, a pictorial representation of this. The only thing that we accomplish by jumping the gun is to add risk to our trade, as well as look to execute it without any real justification.
If Nordstrom takes right off from here, those who got in a little early will capture a little additional room versus the more sensible approach of waiting, but the price for this is the risk of it going further down or languishing in the doldrums where we could have invested in another stock instead that is actually performing in a way that bodes much better.
Depending on our time horizons, this may be a stock worth watching, even though if and when it starts picking up, it still may not be able to establish enough momentum to make sense out of the trade. It’s not enough for a stock to go up, it has to go up enough, and there are some serious questions about this happening right now or anytime soon.
It’s much more sensible to ask to be shown the money, and as they say, money talks, and everything else just walks. This is all about riding momentum and there just has to be something to ride, and we don’t have any yet, other than the other kind that is, the kind we need to be careful to stay well away of.
Editor, MarketReview.com
Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.
Contact Eric: eric@marketreview.com
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