Could Your Portfolio Use Some Retail Therapy?

After the best quarter for the markets since 1987, few stocks still trade near their March 2020 lows. One that bounced nicely, but has fallen back toward those levels is Nordstrom . JWN bottomed at $12.27, then rallied to $23.58 on June 8. As of Tuesday, it was once again available for just $15.45. Government-imposed shutdowns of malls and stores will hurt sales and earnings in fiscal 2020. Nordstrom is now expected to post its first losing year in decades in fiscal 2020, which ends Jan. 30, 2021. It should regain profitability quickly, though, as reopenings continue. JWN's stores in my area around Delaware and Pennsylvania are now back on stream for in-person shopping. Yahoo Finance sees positive earnings per share of $1.78 for JWN in fiscal 2021. That's a conservative target. The firm earned between $3.14 and $3.55 during eight of the nine years stretching from fiscal 2011 through 2019. From 2010 through 2019, JWN typically traded for around 15.6-times earnings. Assume a slightly lower multiple to next year's projected profits and you come up with an 18-month target price of $26.70. That implies upside of 72.8% from today's quote. The goal is almost certainly too low. JWN offered traders chance to cash out above $43 during each of the past eleven years including 2020 year-to-date. The founding family sought to take it private at $50. The board, foolishly in retrospect, turned that offer down as inadequate. JWN has a decent online presence via the flagship store, Nordstrom Rack, TrunkClub.com and HauteLook.com. Upside appears substantial while downside seems minimal from under $16. Yahoo Finance takes a very subdued view on JWN. Even so its 12-month target of $20.94 would provide a greater than 35.2% gain from here. That figure is less than where the stock traded just 23-days ago. Independent research house Morningstar feels more upbeat on JWN's prospects. The firm labels the shares as a 5-star best buy. Morningstar deigns to provide year-ahead goal pricing. It does, however, indicate what it feels is present day fair value for each stock they cover. For Nordstrom that number sits at $34.50, more than 122% above the current quote. Buy/write combinations out to Jan. 21, 2022 look exceptional for those willing to extend their time horizons to 589-days (1.8-years). The numbers in my examples were snapshots of pricing with JWN at $16.18 per share. Buying 1,000 shares in a margin account becomes much cheaper when you can take in large premiums from the sales of both covered calls and naked puts. The out-of-pocket cash for this following Jan. 21, 2022 $17.50 buy/write combo drops to just $3,680. On expiration day there are just two possible outcomes. JWN will finish at $17.50, or higher, or below $17.50. The best-case scenario, with JWN at $17.50 or better, is detailed below. Any move higher of at least 8.2% translates into a 375.5% total return over 1.8 years. That's greater than 208% annualized. Better still, even the worst-case scenario, shown below, appears far from scary. While more cash would be required and the original position size doubled, the break-even point on the entire combination dropped to just $10.59 per share. That's significantly lower than where JWN bottomed in last March's panic sell-off. Unless you think Nordstrom is a bankruptcy candidate, the 34.5% margin of safety should be more than adequate. Using $20 strikes for the calls and puts is a bit more aggressive than the $17.50 version. It lowers the initial out-of-pocket investment while offering even higher potential gains, though. Best-case results, which require a minimum 23.6% uptick by expiration day, lead to 606.7% total returns over the 1.8-year holding period. If JWN fails to reach, and hold $20 by Jan. 21, 2022, you'd need to come up with more cash and to double down on the number of JWN shares held. Break-even is a bit higher than with the $17.50 version of the trade, at $11.4215 per share. That, too, is still below JWN's March 2020 panic low. If Nordstrom does as well long-term as I, Yahoo Finance and Morningstar expect, it will then owning shares outright will work out well. If so, setting up one or both of the buy/write combinations will be even better.

Could Your Portfolio Use Some Retail Therapy?

Nordstrom is a real bargain, but I'm betting it bounces back as the reopenings continue.

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