Nordstrom's Index Exit Presents a Rare Buying Opportunity

The removal of Nordstrom (NYSE:JWN) from the S&P MidCap 400 index on May 22, 2025, marks a pivotal moment for investors. While the delisting stems from its pending privatization—a move that triggered structural changes disqualifying it from the index—the stock now trades at compelling valuation multiples amid a sector in flux. For contrarian investors, this could be a prime entry point to capitalize on an undervalued retail giant.

Valuation: A Discounted Bargain

Nordstrom’s current valuation metrics scream opportunity. Its trailing P/E ratio of 14.34 is well below its historical averages (3-year: 71.18, 5-year: 62.59) and even lags behind peers like TJX Companies (P/E 27.21) and Ross Stores (P/E 22.97). This compression suggests the market has overreacted to near-term challenges.

The EV/EBITDA of 5.63 further underscores its appeal. This multiple is nearly half the industry median of 9.95, reflecting a discount to competitors in the retail space. Meanwhile, its dividend yield of 3.08% offers a modest but steady income stream, backed by a healthy payout ratio of 43.68%.

Financial Health: Improving, But Not Perfect

While Nordstrom reported a net loss of $39 million in Q1 2025, this represents an 81% narrowing from the $195 million loss in Q1 2024. Revenue grew 4.8% year-over-year to $3.34 billion, outpacing analyst estimates. The key driver? A strategic shift toward full-price sales and cost discipline, which boosted gross margins to 37.43%.

Critically, its free cash flow (FCF) yield of 18.41% signals robust cash generation relative to its market cap. However, the Altman Z-Score of 1.86 (below the 3 threshold) and debt-to-equity ratio of 3.76 highlight lingering risks. Yet, these metrics may already be priced into the stock, particularly given the upcoming privatization.

Competitive Position: A Strong Brand in Transition

Nordstrom’s flagship stores and luxury partnerships remain a moat in an era of discount retail dominance. While TJX and Ross thrive on deep discounts, Nordstrom differentiates itself through curated, full-price offerings and a loyal customer base. The company’s digital transformation—evident in its 30% online sales growth in 2024—positions it to compete in the evolving retail landscape.

The privatization deal, valued at $24.25 per share, underscores confidence in Nordstrom’s long-term value. Should the transaction close as expected on May 20, the company will regain agility to invest in growth without public market pressures.

Catalysts for a Turnaround

• Privatization Completion: Removes uncertainty around governance and provides a clearer path for strategic decisions.
• Regulatory Scrutiny: While law firms are investigating the deal’s fairness, the $24.25 price tag serves as a near-term floor for the stock.
• Sector Outperformance: The retail sector has underperformed the S&P 500 in 2025, but Nordstrom’s valuation metrics suggest it’s among the most undervalued names.

Risks to Consider

• Debt Loads: High leverage could constrain flexibility if economic conditions worsen.
• Analyst Skepticism: A “Sell” consensus with a $22.36 price target reflects near-term pessimism, but this creates a margin of safety for long-term investors.
• Post-Index Exit Liquidity: Reduced institutional ownership may lead to volatility, but Nordstrom’s FCF resilience could attract contrarians.

Why Act Now?

The $24.66 stock price is 9% above the privatization offer, but this premium reflects investor faith in the deal’s certainty. With a historical low valuation and a dividend yield unmatched by peers, Nordstrom offers a rare blend of income and upside potential.

Conclusion: A Contrarian’s Play

Nordstrom’s removal from the S&P MidCap 400 is a structural change, not a reflection of its operational health. The stock’s discounted valuation, improving margins, and the privatization’s implied valuation make it a compelling buy for investors willing to look past short-term noise. With a potential catalyst just days away and a dividend yield offering downside protection, now is the time to position for a rebound.

Action: Buy Nordstrom shares near $24.66, targeting $30 within 12 months, with a stop-loss below $22.36.

This article is for informational purposes only. Always conduct your own research before making investment decisions.