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Analysis: In the less rigorous but all important second half of every earnings season comes the retail earnings. Retail, especially on the clothing side, had a very strong start to the year that sort of has trailed off a bit in the last couple months. Yet, the companies reporting thus far in the retail sector have been on fire. Everywhere from shoes to designers to department stores to apparel stores. Everything appears to have been underestimated. Additionally, an even more appealing trend to our position is that higher end retail appears to be doing much better than mid-range to low-end. With its current undervaluation and earnings report looming this even, Nordstrom (NYSE:JWN) may be the perfect place for us to pick up some shares this morning.

Thus far in the retail sector since the beginning of August, fourteen out of seventeen retail companies that have reported earnings have recorded earnings beat. The three misses were from specialty retailers, such as arts and crafts and home decor. The clothing side of things has been on fire. Some great signs have come from Macy’s (NYSE:M), who had a 21% surprise earnings beat. High-end retail like Liz Claiborne (LIZ) and Ralph Lauren (NYSE:RL) had beats of 59% and 36%, respectively. The industry had a great second quarter. Some of the lower end stores have also not forecasted as well as the high end companies, which is something to be aware of in an earnings play.

Nordstrom, itself, has given some great signals for its quarter. They are predicted to report EPS at 0.66 vs. one year ago’s 0.48. The company had some pretty solid same-store increases from one-year ago. In July, sales rose 7.6% vs. the 8.1% analysts were expecting. In June, the company saw its sales rise 14.1%, which was huge compared to the 9.1% that analysts had been expecting. The company missed some in May with a 3.7% rise vs. the 4.8% expectations, but they saw this miss because they postponed their typical half-year sale that caused a smaller rise. The 5% in June definitely makes up for 1.5% missed in the other two months. The company totaled sales of $890 million, $880 million, and $700 million. All these sales were preliminary, and they totaled $2.47 billion. In Q1, prelimary sales totaled $1.81 billion, and the company reported sales above $2 billion. Preliminary sales tend to be underneath actual sales. Current estimates have revenue at $2.40 billion. Adding more for actual results takes revenue well above estimates.

Revenue is definitely underestimated, which means EPS is underestimated as well. Another strong sign for the quarter is that in the past three months, JWN has announced plans to open six new stores. The company is growing and expanding into new markets, which is a sign of more great things to come. The upper end retailer is really doing much better than your middle class and lower class consumer.

"The middle-to-upper customer is showing more stability," says Joe Feldman, analyst at Telsey Advisory Group. "The names that will hold up well are those that cater to this higher-end customer."

The company has a 2.50 EPS yearly outlook. The company hit 0.52 in quarter one, which means they have 1.98 EPS left to go. The company’s Q3 is always weak around 0.50. That leaves 1.48. 0.66, honestly, is not enough to hit this target. So, either JWN overestimated or they are ready for a large beat. I go with the latter.

Technically, JWN is in a perfect position for a rise. The bearishness of this week has brought the stock down more than 5%, and it has caused the stock to become undervalued and oversold. The decline, today, has pushed that even further, and it is definitely a great buying opportunity.

I am okay with buying and then selling it later in the day if we can get 3%, but I also am confident in an Overnight on this one. Either way…it looks great!

Entry: We are looking to get involved at 32.90 - 33.10.

Exit: We are looking to exit for a 3%+ gain or hold overnight.

Stop Loss: 3% on bottom.

Source: Thursday's Buy Pick: Nordstrom Inc.