We never take [one-year figures] very seriously. After all, why should the time required for a planet to circle the sun synchronize precisely with the time required for business actions to pay off?
-- Warren Buffett, 1984
Investors tend to be an impatient bunch. Indeed, this is the key reason that patient investors who play the long game can achieve outstanding investment returns. Berkshire Hathaway CEO Warren Buffett has become one of the richest people in the world by being one of the most patient investors ever.
One way that patient investors can achieve outsize gains is by identifying companies that are investing heavily to produce growth. If most investors are impatient, they will undervalue a company that sacrifices current earnings in order to produce more income in the future. Today, Nordstrom (NYSE:JWN) is just such a company, and it represents a big opportunity for long-term investors. (More on that later.)
Focus on the long run
In the above quotation, Buffett reveals one of the keys to his success at Berkshire Hathaway. In retrospect, it seems obvious that investments, profit improvement initiatives, etc. do not always pay off immediately. In some cases, these actions even lead to lower short-term earnings.
However, in a world where so many others employ short-term thinking, Buffett's long-term mentality is very valuable -- especially for Berkshire Hathaway shareholders! For example, Buffett grew Berkshire Hathaway's insurance business at an astounding rate for decades by being willing to accept "lumpy" results when other insurance company CEOs felt the need to keep earnings "smooth" by avoiding the risk of big one-time losses.
Instead of a one-year time horizon, Buffett argues that five years is the minimum time period that investors should consider when looking at a company's results. Buffett's time horizon tends to be even longer, as evidenced by the fact that he has held on to many of Berkshire Hathaway's main investments for decades.
Even with a five-year view, some prudent long-term investments may seem like losers. However, if you can't be quite as patient as Buffett, a five-year time horizon will still allow you to identify opportunities that other investors pass up.
One great company playing the long game
Warren Buffett hasn't invested in Nordstrom -- perhaps because he has had some trouble in the retail sector in the past. However, Nordstrom is exactly the kind of company with a long-term focus that is undervalued due to the short-term mentality of many investors.
Nordstrom aims to maintain a long-term high-single-digit revenue growth rate. It also wants to earn a mid-teens return on invested capital -- this refers to how much money the company makes as a percentage of its capital base. (A higher ROIC means a company is more efficient at making money for any level of investment.) Very few large retailers can achieve both of these goals.
In order to drive future growth, Nordstrom is investing heavily in technology to boost online sales, growing its Nordstrom Rack store base (its off-price retail division), and expanding into Canada.
All of these initiatives result in short-term costs that are weighing on Nordstrom's earnings today. However, assuming the projected sales gains materialize, these investments will set the stage for higher long-term earnings power. (To put it a different way, earnings growth will accelerate in the next few years as Nordstrom's level of investment moderates.)
Nordstrom's expansion into Canada represents the most easily quantifiable example of this phenomenon. Nordstrom expects to lose $35 million in Canada this year. There are two main reasons for this.
First, new stores can take several years to ramp up to a normal sales rate, which means there is less revenue to cover fixed expenses. This is especially true in a brand-new market.
Second, Nordstrom is incurring significant pre-opening costs. For instance, it is hiring 30 managers for the Ottawa store that is opening next year and bringing them on an all-expenses-paid three-month trip to Seattle for orientation and training. It ran a similar program for the Calgary store that is opening in September. The Ottawa store, expected to open in March, will be the company's second in Canada and is expected to have 350 employees in sales and support roles.
The $35 million that Nordstrom expects to lose in Canada this year represents an investment in growth. Obviously, Nordstrom executives believe they can earn a high long-term return on the investment by building a profitable franchise in Canada. By contrast, the market is ignoring the value of that investment.
Foolish bottom line
Over the past five decades, Warren Buffett has used patience as a competitive advantage to deliver market-beating returns for Berkshire Hathaway investors. The key lesson for other investors is that you can use a long time horizon to your advantage, because many Investors undervalue companies that are sacrificing short-term earnings for long-term growth.
Nordstrom is a company that may not be getting credit for the costs it is incurring now to pave the way for future growth. Nordstrom's 2014 earnings will be depressed by start-up costs related to its rapid store expansion and heavy technology investments. However, the long-term result should be faster earnings growth -- producing Buffett-like returns for patient investors.
Adam Levine-Weinberg owns shares of Nordstrom. The Motley Fool recommends and owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.