As the numbskulls ducked out of Nordstrom (JWN) in after-hours trading you got a visual, virtual and visceral example of how imperfect stock markets are and what a waste of time and energy so much of what's called thinking and analysis can really be.
Let me set the stage. Nordstrom made a commitment several years ago to be competitive online, offline and wherever else they had to be in order to be able to defeat the likes of Macy's (M), Saks (SKS), Neiman, Ross Stores (ROST), TJX (TJX) and Amazon (AMZN).
Tall order. These are all, in their own way, excellent competitors. When I spoke with Blake Nordstrom, the president of the company almost a year ago, he said that to defeat all of these opponents the company would have to commit several billion dollars in infrastructure. It wasn't enough to offer omni-channel. He also said the company had to offer an omni-channel experience to rival the best customer service company in the world, Amazon.
When investors hear "investment," what they think about is a decline in earnings per share. Investment's a dirty word. The idea, though, is that one day, investment will peak and we will see earnings flow through. That's been the hope for ages, for example, for Amazon, and the principal reason why it has run this year is the possibility of peak investment within the near future as opposed to "within our lifetimes," which had become the bears' mantra.
So last night the smartest people -- and the most capitalized cohort focused on the name -- wanted to hear about peak spending, given that Nordstrom had traced out a $4.3 billion budget -- 5% of current sales -- with tech, the principal deadweight loss comprising 35% of the plan, the rest store expansion including the ridiculously expensive coming store in Manhattan and a staged build-out in Canada.
So, initially Nordstrom issues a release that says same store sales are in line to better, but that earnings are light. Now, the selling begins: the stock goes down a quick three points. At the time I was sitting with my stage manager, Kyle Remaly, and I said $74 bid 50,000, pretending to be like the old days. That's down about three from where it was at the close, and falling hard.
The next thing I know the stock's offered at $74. I say $73.75 for 50. He asks what the heck am I doing. I said that the people who are selling have not a clue of what's driving the stock, and I want to pick some up down three and a quarter dollars because what matters is capex and that, unless they say they are going to spend even more than they thought and it would last longer, you are going to get a nice bounce when the call begins.
The stock then settles at $74 when the company starts talking. It starts to go through the numbers and they are fine, but then in the forward guidance the CFO says that 2015 will be the peak year of company spend. In maybe three minutes the stock's unchanged; when he then hints that spending can decline for other than the Manhattan build-out, the stock goes up a buck from where it went out, and is trading north of $78. It stays there until some analyst asks if peak spending means "accelerated earnings growth," and immediately the CFO tells him not to conflate peak spend with accelerated earnings growth and the stock sheds a dollar.
It then stabilizes when the company says that business got better throughout the quarter, particularly the off-priced Rack, and how the holiday season wasn't promotional. Then the call ended and so did the trading.
What's instructive here? I don't encourage after-hours trading, but the morons who shoot first are often such dopes they you get a chance to make money. With Nordstrom, knowing the key metric was all it took. I wish there were more to it. But there isn't, because with a peak spend you have a terrific earnings growth story, and without it? You have a $75 stock. Let's see if, when the real investors come in, they understand the difference.