Has Nordstrom Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Nordstrom (NYSE: JWN  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Nordstrom.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 4.5% Fail
  1-Year Revenue Growth > 12% 11.7% Fail
Margins Gross Margin > 35% 37.3% Pass
  Net Margin > 15% 6.5% Fail
Balance Sheet Debt to Equity < 50% 174.9% Fail
  Current Ratio > 1.3 1.91 Pass
Opportunities Return on Equity > 15% 36% Pass
Valuation Normalized P/E < 20 15.84 Pass
Dividends Current Yield > 2% 1.8% Fail
  5-Year Dividend Growth > 10% 17.3% Pass
       
  Total Score   5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Nordstrom last year, the high-end retailer has lost a point. Sales growth over the past year slowed just enough to fail our test, yet the bigger concern is a debt level that continues to rise as a percentage of equity.

Nordstrom stands out from the crowd of luxury retailers because of its strong customer loyalty. At a talk at Fool HQ last year, Whole Foods CEO John Mackey called out Nordstrom and Southwest Airlines (NYSE: LUV  ) for their commitment to outstanding customer service, and it's clear that customers respond well to that treatment.

But Nordstrom doesn't take those customers for granted, instead seeking to deliver hot new fashions to keep up with the times. A few years ago, the company hired a product manager from lululemon athletica (Nasdaq: LULU  ) to help design a yoga line of its own. The move hasn't exactly detracted from lululemon's success, but it demonstrates how Nordstrom acts proactively to give its customers what they want.

The big question for Nordstrom is whether luxury retail can keep up its strength. Both Tiffany (NYSE: TIF  ) and Williams-Sonoma (NYSE: WSM  ) , which cater to luxury shoppers as well, gave a poor outlook for the recent holiday season, cutting their guidance as consumers seem to be rediscovering their frugal sides. But on the other hand, strength in the economy could help boost other retailers back up to Nordstrom's level, potentially raising all boats in a recovery.

For Nordstrom, short-term perfection isn't as important as maintaining its huge reputation as an extraordinary high-end retailer. From year to year, the stock may move in and out of favor, but over the long haul, the company treats both customers and shareholders right.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

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Click here to add Nordstrom to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of lululemon athletica and Whole Foods Market. Motley Fool newsletter services have recommended buying shares of Williams-Sonoma, Whole Foods Market, Southwest Airlines, and lululemon athletica. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 25, 2012, at 2:49 PM, luke669 wrote:

    This exercise is silly. Your trying to compare general metrics to all sectors.

    (1)A one year growth rate of 11.7 is excellent for an established soft goods retailer.

    (2)Net margin is very good in this segment. Name another highend soft goods retailer doing JWN's volume with a 15% net. I can't think of any.

    (3)Current yield is excellent for any retailer. Any yield is good in this segment.

    Then you compare a soft good retailer to two hard goods retailers TIF and WSM. This is like comparing a Bently to a Mink coat.

    The perfect stock? No, but in it's sector about as close as you can get

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