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 and then decide whether Nordstrom (JWN 0.13%) 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.
• Moneymaking 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.

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

Since we looked at Nordstrom last year, the company regained the point it lost from 2011 to 2012. The stock's dividend just barely hit the 2% mark, and the stock has also done reasonably well, rising nearly 15% over the past year.

Nordstrom is extremely unusual among retailers in that it attacks two completely different segments quite well. With its namesake Nordstrom retail stores, the company attracts upscale shoppers looking for quality customer service and stylish products. Yet its Nordstrom Rack discount stores appeal to bargain-conscious shoppers as well. With same-store sales jumping 8.6% in December, that business model clearly appeals to its customers, and it's also crushing the competition. Macy's (M -2.29%) expects to see sales grow at only a third the pace of Nordstrom in 2013.

One way in which Nordstrom has upended conventional wisdom is by emphasizing its online sales experience. Its direct-to-consumer division has invested heavily in IT, and in contrast to Amazon.com (AMZN -2.73%) and its frequent strategy of providing the lowest price for online sales, Nordstrom's strategy of focusing on high-margin merchandise and minimizing discounting has worked very well.

Fears of relying too much on high-end customers have plagued Nordstrom investors, as moves like the fiscal-cliff compromise's increase of tax rates on high-income taxpayers could lead to reduced spending. Coach (TPR 0.23%) plunged earlier this week on weak sales inspired in part by a struggling economy, and yoga apparel retailer lululemon athletica (LULU 1.33%) also disappointed investors hoping for better results. Yet Nordstrom plans to keep expanding to take advantage of its good times while they last.

For Nordstrom to improve, its best bet is to work on getting its debt better under control. In the long run, though, Nordstrom has the potential to get as close to perfection as any retailer can hope.

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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