Nordstrom Trades Down as Its Stock Soars

04/27/2010 10:20 am EST


Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

Andrea Kramer of Schaeffer’s Investment Research says the high-end retailer is expanding its down-market outlet operations, but its stock is top of the line.

[A recent] article (“Will Nordstrom’s Discount Stores Hurt Its Brand?," April 15th) highlights recent comments from Needham & Co. analyst Christine Chen, who opines that Nordstrom's (NYSE: JWN) efforts to appease less affluent shoppers could backfire in the long run.

Most notably, Chen says the luxury retailer is building its less expensive Nordstrom Rack locations too close to its full-price stores, which could encourage consumers to shift their spending to the lower-priced options.

"Even more detrimental to Nordstrom's strategy is its Manhattan debut," the column notes. After an unsuccessful attempt to secure traditional store space on Park Avenue, the retailer instead decided to plan a 32,000-square-foot Rack location near less ritzy Union Square. "You're making your debut in Manhattan with an outlet store? I find that a little bit odd," quipped Chen, adding, "I just wonder what that does to the Nordstrom brand."

Nordstrom's attempts at catering to a middle-class demographic haven't hurt the stock on the charts in the least, with the shares of JWN tagging a fresh high of [above $46 Tuesday—Editor]. In fact, the stock has skyrocketed more than 115% during the past year, guided higher atop its ten- and 20-week moving averages.

Nevertheless, a handful of analysts—like Chen—remain leery of the security. According to Zacks, nine out of 20 ranking analysts still consider JWN a Hold or worse. Meanwhile, the average 12-month price target on the security [recently rested] at only $44.41—[below Monday’s close].

Meanwhile, short sellers have upped the bearish ante lately, too. During the past month, short interest on the stock swelled by [over 10%], and [recently represented] about 9% of JWN's total available float. In fact, at the equity's average trading volume, it would take almost seven sessions for all of these skeptical positions to unwind.

Furthermore, the stock's [recent] Schaeffer's put/call open interest ratio (SOIR) of 2.29 implies that puts more than double calls among options with less than three months to expiration. What's more, this reading ranks in the 78th annual percentile, indicating that near-term option traders have been more pessimistically positioned toward JWN only 22% of the time during the past year.

As contrarians, JWN's technical prowess of late—juxtaposed with the widespread bearish bias on the Street—presents an appealing bullish opportunity. As the stock extends its quest for new highs, a wave of upbeat analyst endorsements, a short-squeeze rally, or a reversal in sentiment in the options pits could all act as catalysts even higher for the shares.

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