Profit From The ‘Massacre on 34th Street’…

I’ve never shopped at Macy’s (NYSE: M), nor have I followed it closely as an investment candidate. Like many, I know the iconic department store best from its prominent role in the classic Christmas film, Miracle on 34th Street.

But Macy’s investors may remember January 10 as the Massacre on 34th Street. The stock fell off a cliff that day, tumbling nearly 19%, the sharpest decline in its storied history.

It was a bad day for many retailers. JC Penney (NYSE: JCP) dropped 4.4%. Kohl’s tumbled more than 10% at one point. But the harshest punishment was reserved for Macy’s, which lost $1.8 billion in market value in a single session.

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So what terrible transgression did the company commit to bring down this wrath? Well, management said that revenues would be flat in 2018. Let’s be honest — nobody expected Macy’s to deliver sizzling growth. The prior outlook called for sales to inch up just 0.3% to 0.7% this year. So, we’re talking about a downward revision of a fraction of a percentage point.

As for earnings, management put forth a guidance range of $3.55 to $3.75 per share at the start of the fiscal year. After the third-quarter earnings release in November, that forecast was raised to between $4.10 and $4.30 per share. Now, the moving target has been knocked back to around $4.00.

That’s a fairly mild revision. And $4.00 per share is still much better than what the company was originally anticipating. So Macy’s biggest sin was bothering to tweak its forecast in November. Had management simply kept its mouth shut and left the original outlook in place, this epic drubbing may have been avoided altogether.

This is exactly why some companies deliberately lowball their estimates — or refuse to play the guidance game in the first place.

Macy’s Is Down, But Not Out… 
Let’s be clear, Macy’s is not Sears. The high-end retailer operates 690 stores that hauled in nearly $25 billion in sales last year. The company has reported five consecutive quarters of positive same-store sales, or “comps.” And it banked a profit of $3.77 per share in 2017. Earnings are expanding, not shrinking.

That’s not to say that things went swimmingly during the holidays. According to management, the company started strong on Black Friday and finished strong in the days leading up to Christmas — but the weeks in between could have been better. Strength in shoes, perfume and home decor was offset by weakness in other categories like sportswear and cosmetics.

Analysts attribute the shortfall not to foot traffic (which was strong), but to store merchandising decisions. Fortunately, that can be easily remedied.

M Looks Like It Could Be A Great Deal 
I didn’t intend to focus a large part of the most recent issue of my Daily Paycheck premium newsletter on Macy’s. It was supposed to lead into a larger discussion on pricing disconnects in this choppy market. But the deeper I dug, the more investment potential I saw.

To be sure, department stores like Macy’s face growing digital threats. But business isn’t exactly drying up — the cash registers ring up more than $2 billion in sales every month. Thanks to this pullback, the company is now being valued at just 4.5 times earnings — while the dividend yield has been driven to 6%. The company also owns billions in real estate and is actively monetizing some of those assets.

This recent 20% plunge looks to be an overreaction. There’s a good chance I might nibble at a few shares of Macy’s soon. But not just yet… Instead, I’m investing in another oversold retailer with even more potential. I’m saving that analysis for my premium readers, though.

In the meantime, if you’d like to learn more about Daily Paycheck — or learn how to get your hands on the name of that pick — just go here now