Back in March, I outlined my reasons for loving Macy’s (NYSE: M) stock for a long-term portfolio. Entering on a break out of $30.00 per share, the original call panned out to be a solid winner with shares surging to just a smidge below our March 2018 price target of $42.00 per share. Next, I confidently upped the price target to $50.00 per share.
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On Aug. 16, that forecast was proven wrong as the bottom fell out of the stock. The entire retail sector was rocked, and Macy’s was no exception! The shares plunged from near $42.00 into the $34.00 zone as investors panicked. Investors who judicially utilize trailing stops booked handsome profits from the initial entry, but those who entered closer to the top tick took a hit so far in the stock.
The Good News
Price remains above the technically critical 200-day simple moving average and shares have returned to the value zone. Getting long now right now makes sense both
What On Earth Happened To Macy’s?
After a handsome run up from mid-April to mid-August, Macy’s shares fell sharply. It wasn't just Macy’s falling sharply. On Aug. 16, the Dow gave back over 300 points with the entire retail sector getting destroyed.
Macy's Customer Growth Partners President Craig Johnson told CNBC, “Macy's is certainly playing a role across the entire department store sector [sell-off], but the investor skittishness may be due more to caution on the retail sector's sharp spike upwards in stock prices this year, than to any performance issue at Macy's."
Economist Jeff Kleinhenz said, "Consumer spending is the backbone of the current economic expansion, but the fly in the ointment is uncertainty regarding tariffs. If they escalate, they will no doubt weigh on confidence and household spending."
It appears that Macy’s stock simply rode the macro pressure lower in retail and it was nothing inherently bearish about the company. In fact, the new lower prices create a tremendous opportunity for long-term investors to buy the shares at a steep discount.
Here are five reasons why I still love Macy's stock:
1. Price/Earnings Ratio
The Price/Earnings Ratio is a crucial metric to determine if a stock is valued fairly. It quantifies how much investors are willing to pay for each dollar of earnings of the stock. In other words, it is the measure of the share price relative to the annual net income earned per share.
Presently, Macy’s trailing twelve months P/E Ratio is around seven which is very favorable for the sector and market as a whole. The numbers seem to indicate that Macy’s is undervalued at the current price.
2. Price/Sales Ratio
Macy’s Price/Sale ratio is signaling that the stock is undervalued.
3. Higher Guidance
I love the guidance at Macy’s! The company lifted sales and earnings per share (EPS) guidance in the last quarterly report. This fact shows that management has solid reasons to be confident in the future. The guidance sets the tone for the entire company. When guidance declines, it often casts a bearish pall on the stock. Improved guidance has the opposite effect. Remember, stocks operate on anticipation of the future. Guidance helps form investors' expectations.
4. Solid Results
Macy’s stock plunged on Aug. 15, after its second-quarter earnings release. One would expect that the earnings disappointed Wall Street, resulting in the sell-off. Well, nothing could be further from the truth. Macy’s earnings beat estimates on both the top and bottom lines.
Examples include adjusted net earnings climbed 52%. To be sure, some of this was due to real estate sales, but this signals a company working to improve shareholder value. At the same time, comparable store sales on an owned plus license basis added 0.5% on a year over year basis.
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What has me most excited about the stock is that gross margin climbed 80 basis points year over year. While in and of itself it may not seem like much, but the fact that the number solidly beat the competition is a great sign.
Also, the success of Macy’s mobile sales channels and loyalty program is forecasted to lift mobile sales above $1 billion in 2018. I predict that the mobile efforts will continue to improve the bottom line over the next five or more years.
While visiting several Macy’s stores and conducting “boots on the ground” research, I was extremely impressed with the feel, layout, and product selection in the stores. In fact, I was blown away by the attractive vibe and uniqueness of the popup marketplaces inside the stores. The brands I witnessed were truly cutting-edge and exciting. The stores have an authentic feeling of discovery and exploration that can't be replicated online. It is this innovative nature that will continue to propel Macy’s into the future.
Risks To Consider: I like to think of the modern retail environment as similar to the tech industry. Just like the tech industry, competition in retail is fierce, not to mention the macro forces at work in the minds of consumers. It is only a matter of time until the competition starts to follow Macy’s concept in earnest.
Action To Take: As long as the share price stays above the 200-day simple moving average currently around $32.00 a share, I am an aggressive buyer of the shares. My target price is $50.00 per share and stops make sense at $28.93 per share.