Not too long ago, Nordstrom (NYSE:JWN) seemed to be back on track. The upscale retailer posted enviable sales growth in the second quarter of fiscal 2018. This propelled Nordstrom stock to a multiyear high of $67.75, which it reached last November.

However, sales growth in Nordstrom's full-line business slowed dramatically beginning in the third quarter. By the fourth quarter, the company was reporting comp sales declines again for the full-price side of the business. As a result, Nordstrom stock has lost more than a third of its value since early November and now sits near a 52-week low.

JWN Chart

Nordstrom Stock Performance, data by YCharts.

Nordstrom shareholders should be relishing this decline in the stock price. After all, as Warren Buffett noted in one of his famous shareholder letters two decades ago, falling stock prices are only bad for people looking to sell stocks. For investors following a buy-and-hold strategy, the recent plunge in Nordstrom stock is setting the table for long-term gains.

Check out the latest earnings call transcript for Nordstrom.

The underlying business is healthy

If Nordstrom's business were actually in trouble, declines in the share price wouldn't be a reason to buy and hold the stock. However, investors seem to be dramatically underestimating the company's long-term prospects right now.

For one thing, the Nordstrom Rack off-price business is positioned in a fast-growing segment of the market. Nordstrom's off-price operations posted a 3.5% comp sales gain in fiscal 2018, despite a slow start to the year. New stores are further boosting Nordstrom's off-price sales.

Furthermore, while Nordstrom's full-line business remains a work in progress, a small group of underperforming stores seems to be holding back its sales and earnings growth. Nordstrom is gradually closing these serial underperformers. Meanwhile, it is set to open a flagship store in Manhattan later this year, which should more than replace the sales it has lost from locations it closed -- and at a much higher level of profitability.

The entrance to a Nordstrom Rack store, with a Nordstrom full-line store in the background.

Nordstrom's off-price business is outperforming its full-line stores. Image source: Nordstrom.

Nordstrom won't get much of the benefit from its new flagship store in fiscal 2019 -- and it will incur $35 million of pre-opening costs -- but it still expects its adjusted operating profit to climb from $909 million last year to a range of $915 million to $970 million. Profit growth is likely to accelerate in 2020, as Nordstrom finally starts to capitalize on the Manhattan flagship store and some of its other recent growth initiatives.

Nordstrom is returning tons of cash to shareholders

The nice thing for investors about Nordstrom stock plunging is that it has occurred just as the company ramps up a multiyear program to return capital to shareholders. Last year, Nordstrom spent more than $900 million on dividends and buybacks. Most of that capital return activity occurred in the fourth quarter, when Nordstrom spent over $500 million to repurchase 11.4 million shares at an average price of $47.97.

Nordstrom may scale back its capital return program somewhat in 2019, as it expects capital expenditures to rise by about $300 million year over year, largely due to the cost of completing the Manhattan flagship store and investments in its supply chain.

However, Nordstrom expects free cash flow to surge to $800 million next year, as capex declines and its investments start to pay off. Free cash flow should continue to grow in the years beyond 2020. As a result, for the 2018-2022 period as a whole, Nordstrom plans to return about $5 billion to shareholders through dividends and buybacks. Thus, the pace of capital returns could actually accelerate over the next few years.

Nordstrom stock is absurdly cheap

Shares of Nordstrom currently trade for less than 12 times the midpoint of management's 2019 guidance for earnings per share. This implies that investors expect little or no future earnings growth, whereas Nordstrom's growth initiatives are set to begin paying off in a big way next year.

Furthermore, Nordstrom still plans to return another $4 billion of cash to shareholders over the next four years. That's equivalent to nearly 60% of the company's current market cap.

The longer Nordstrom stock stays down, the more long-term shareholders will profit from the company's future earnings growth. (With a lower stock price, Nordstrom can buy back more shares, driving faster EPS growth.) Enrolling in a dividend reinvestment program -- as I have done with my own Nordstrom shares -- adds to the potential upside.

By 2022, Nordstrom expects annual free cash flow to reach $1 billion. Based on Nordstrom's current share count, that would amount to a little over $6 per share, which would warrant a significantly higher share price. But due to Nordstrom's aggressive capital return program and its low share price (which creates a favorable environment for share buybacks), free cash flow per share could surpass $8 by 2022. That could drive Nordstrom stock to $100 -- or beyond.