Despite a history of strong performance and exceptional returns on invested capital, high-end department-store operator Nordstrom (NYSE:JWN) has seen its shares ruthlessly sold off over the past three months. The company, a retail staple of America's upper middle class, was largely insulated from the economic travails that affected so many since 2008. Nordstrom's sales continued to march upward while numerous peers struggled. It has expanded into new markets via new store concepts like Nordstrom Rack. It planted the seeds for an expansion into Canada. All this happened while averaging a staggering 35% return on equity over the past five years.

Now, despite a 40% share price drop since its highs of summer 2015 and arguably a bright future ahead of it, Nordstrom is fairly valued. Here's why. 

Price is what you pay; value is what you get
An investor needs to always be careful to not overpay for a business. A business can thrive, grow by leaps and bounds, and generate exceptional returns on capital, all while its shareholders make squat had they overpaid. Just ask shareholders of Microsoft, had they bought in at the height of the tech bubble:

MSFT Chart

MSFT data by YCharts.

Not only did it take a long time for Microsoft shareholders to get back to square one, but also sales and profits at Microsoft over the time period in question absolutely exploded. Revenue grew from just $22.96 billion in fiscal 2000 to $93.58 billion 15 years later, while profits rose to over $22 billion (excluding one-time charges) from $9.4 billion at the turn of the millennium. Microsoft continued to grow and adapt over those 15 years, all while shareholders went literally nowhere.

Why? Shares in Microsoft got ahead of themselves, it's as simple as that.

This also seems to have been the case with another Seattle-based company: none other than Nordstrom, which traded for an all-time high of $83 as recently as this summer. At its highs of summer 2015, it was trading hands for a healthy 23 times earnings. Not as crazy as Microsoft in its heyday, but definitely rich given the valuations of its peers and each retailer's earnings growth profile:

 

Nordstrom

Dillard's (NYSE:DDS)

Macy's (NYSE:M)

52-week high

$83

$144

$73

52-week high P/E

23

18.7 

17.7

Current price

$47

 62

$36

Current P/E

14

 8.13

8.6

FY 2020 EPS estimate

$5.43

 $7.90

$6.45

5-year estimated EPS growth

 5.92%  N/A*  7.1%

Source: S&P Capital IQ.
* No analyst estimates for FY 2020.

The first thing the reader probably noticed was the absolute carnage that visited the department-store retail sector. Both Dillard's and Macy's half fallen by half from their 52-week highs, and both Macy's and Dillard's now support much more reasonable valuations.

That aside, Nordstrom both traded for, and continues to trade at, a hefty premium to its peers. One begins all the more to realize that Nordstrom certainly got ahead of itself at its highs when comparing its valuation to the entire S&P 500, which currently has a P/E of just over 20. Nordstrom's earnings growth going forward just isn't strong enough to warrant a meaningful premium to its peers or the broader market at large.

Foolish takeaway
Am I saying current Nordstrom shareholders should sell out of their stakes, or that those who believe in Nordstrom's future shouldn't buy a few shares? Not at all. Nordstrom has a great brand and exceptional returns on equity, and it continues to invest in new initiatives that will drive its success for years to come. All I'm trying to convey is that investors shouldn't expect to make a killing on their Nordstrom shares. After falling 40% from its highs, this one is a stock that the market is getting right. 

Sean O'Reilly has no position in any stocks mentioned. The Motley Fool recommends Nordstrom. 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.