Mad Money

Cramer recommends Nordstrom after bullish post-earnings bounce

Key Points
  • "Mad Money" host Jim Cramer tracks the drama at Nordstrom, a recovering retailer in the midst of takeover negotiations.
  • Cramer argues that Nordstrom's stock is an attractive buy on its improving business and a potential buyout.
Cramer recommends Nordstrom

Sometimes, CNBC's Jim Cramer finds it helpful to take a step back from a market clouded by politics and zoom in on major company-specific stories.

"Consider the case of Nordstrom, ... the swanky department store chain I like so much with a story that's reaching soap opera levels of melodrama," the "Mad Money" host said on Wednesday.

Shares of Nordstrom took a hit after the retailer released its fourth-quarter earnings last week. The results were mixed: earnings per share came in weaker than expected, but revenue and same-store sales (a key metric for the industry) beat Wall Street's estimates.

But after spending last Thursday in the penalty box, Nordstrom's stock bounced back on Friday, climbing more than $5 per share, or nearly 12 percent, from its lows.

"When a stock can bounce like that off supposedly bad news, you've got to stand up and pay attention," Cramer said.

Part of the reason for Nordstrom's comeback was the revival of takeover negotiations at the department store chain. Since 2016, members of the Nordstrom family have been trying to take the company private to no avail due to financing issues.

With the retail environment and consumer spending now in recovery, negotiations have restarted. On Monday, news broke that a special advisory committee for Nordstrom's board rejected the family's initial takeover offer.

Cramer said the family's offer of $50 per share was a "low-ball offer given that the stock was selling for just under $52 when the news broke."

"But you know what? I am still regarding it as a game-changer," he said. "It is no secret that I like the stock and, by the way, the company. The darned thing only gets more attractive as it [goes] lower."

A key problem investors had with Nordstrom's latest earnings report was a major decline in its retail gross margin. But the 40-basis-point hit was largely due to rising occupancy expenses tied to the growing discount Nordstrom Rack business and expansion in Canada — "growing pains," according to Cramer.

Management also gave some confusing guidance, predicting lower than expected revenue growth in 2018 but better than expected earnings.

"Many people on Wall Street simply don't believe Nordstrom will be able to become so profitable so quickly," the "Mad Money" host said.

Others thought differently, however. After Nordstrom's drop, institutional investors stepped in on Friday and started buying the stock in droves, convinced that the company's growth strategy would pay off.

Cramer, whose charitable trust owns the stock, concurred: Nordstrom has been investing heavily in bolstering its online presence, opening new stores in New York and Canada and building out its Nordstrom Rack business.

Now that the company can scale back spending, which has put pressure on its razor-thin margins, it's not so outlandish to predict that Nordstrom could turn profitable, Cramer said.

"That's why I continue to like this stock," he said. "The potential for a leveraged buyout or even a flat-out takeover is just the cherry on top."

And even if the Nordstrom family's "low-ball" offer happened because they're having trouble financing the deal, Cramer said the $50 stock price could now be considered a floor.

"In other words, with Nordstrom currently trading at $51 and change, the news of their bid means you're getting some amazing risk-reward," the "Mad Money" host said.

"Bottom line? The way Nordstrom bottomed on Friday after a not-so-hot quarter [was] incredibly bullish," he continued. "When a stock goes up on bad news, you know it's got something real going for it. And given that the Nordstrom family wants to buy the whole business at $50 a share, I think it's pretty darned compelling for your portfolio right here at $51."

WATCH: Cramer unpacks the "soap opera" at Nordstrom

Cramer recommends Nordstrom after bullish post-earnings bounce

Disclosure: Cramer's charitable trust owns shares of Nordstrom.

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