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Wait until there's real revenue growth before buying Nordstrom: Trader

Key Points
  • Telsey Advisory Group upgrades Nordstrom to an "outperform" rating. 
  • The firm is optimistic that the retailer can achieve its long-term growth targets.
  • "Halftime Report" traders Jim Lebenthal and Sarat Sethi believe there are other names in the sector with more potential upside.  

Nordstrom shares have more than tripled the return in the this year and there’s still another 10 percent rally ahead, according to Telsey Advisory Group.

The firm upgraded the retailer to an “outperform” rating and reiterated its call for shares to hit $57.

“Post the company’s investor meeting held yesterday in Los Angeles, we came away with renewed optimism around Nordstrom’s longer-term growth trajectory,” analyst Dana Telsey wrote in a note to clients Wednesday. “A well-established and highly regarded management team… remains in place to drive the company towards its goal of becoming a leading fashion retailer in the digital world.”

On Tuesday, Nordstrom outlined its 5-year financial targets for earnings to grow 5 to 6 percent from 2017 to 2022, with annualized sales growing at a rate of 3 to 4 percent. Management also expects to see further market share gains from the company’s “generational investments in digital sales.”

Despite the company’s growth targets, HPM Partners’ Jim Lebenthal believes that it’s still too early to buy the stock.

Telsey bets on Nordstrom, upgrades to outperform

“This space is all about revenue growth… and you’re not going to know if revenue is growing sufficiently to meet those targets until later in the year,” Lebenthal said on Wednesday's "Halftime Report". “I think you wait until at least September when you get the back-to-school figures.”

For investors looking for opportunities in the retail sector, Lebenthal prefers Macy’s and Target, as both “have better prospects and lower multiples [than Nordstrom].”

Nordstrom currently trades at 15 times next 12-months’ earnings, while Target trades at 14 times and Macy’s at 10 times.

Retail stocks spent most of 2017 under pressure due in part to competition from Amazon, with the XRT retail ETF ultimately gaining 2.5 percent compared to the S&P 500’s near 20 percent rise.

But Douglas C. Lane’s Sarat Sethi still sees longer-term value in retailers, such as Macy’s and Hudson’s Bay, even as the group has rebounded from last year’s lackluster returns.

“They can be investable because they are cash flow rich companies that, if they optimize their business, I think they will be really good returns in the long-term.”

Like Lebenthal, Sethi believes investors should wait for September sales figures before buying Nordstrom. He did say, however, that he believes it's a “very well-run company with a high-end customer.”

Nordstrom has risen more than 12 percent year-to-date, but Ritholtz Wealth Management’s Josh Brown sees more secular headwinds ahead for the company and the brick-and-mortar retail space more broadly.

“Let’s keep it real, these are trades, none of these are investments,” Brown said. “Nordstrom is trading where it traded in 2012…the stock does nothing. It’s literally like waking up every day and punching yourself in the face.”