Quantcast

Has Macy's (M) Finally Reached the Point Where it Represents Value?


Shutterstock photo

Regular readers of Market Musings will be aware that contrarian trades generally appeal to me. Markets, like the people that they reflect, tend to overreact to headlines and that inevitably creates short-term opportunities. That was the principle behind, for example, my assertion a couple of days ago that Apple (AAPL) would rebound after a big drop.

Contrarian trading, however, is not often a good idea when it comes to trades with a longer time horizon, and especially when the decline that makes a stock look cheap is a long-term, industry-wide trend.

Still, at some point, assuming bankruptcy doesn’t appear to be imminent, prolonged declines do lead to value. Macy’s (M) looks to be at that point.

There are several things that point to that. The most obvious are conventional value metrics that have passed their logical conclusion, but the most powerful is more to with what is the essence of a contrarian trade, market psychology.

Let’s look at those metrics first.

The most basic measure of value is the price to earnings ratio (P/E), also known as the “earnings multiple.” Shares represent fractional ownership of a company, and the P/E shows how much of a corporation’s overall profit is attributable to each share.

There are two types of P/E, trailing and forward. The price in each case is the current share price but a trailing P/E is calculated using the last four earnings reports, while forward multiples use an average of analysts’ predictions for the next four.

The average trailing P/E for stocks in the S&P 500 right now is around 22, meaning that the stock of the company is trading at 22x earnings over the last year. So in theory, anything with a P/E below that can be regarded as “cheap.”

Of course, it isn’t that simple, as prevailing P/Es differ by sector and industry, and are affected by a company’s immediate and long-term prospects. Even so, when you compare Macy’s’ P/E of around 6 to the average it suggests value.

Retail, and department stores in particular, are under pressure for good reasons, of course, but that suggestion of value is confirmed if you compare M to, say, Nordstrom (JWN) with a P/E of over 11 or Dillard’s (DDS) with a multiple of over 10.

If Macy’s were in the position of a company like JC Penney (JCP), where losses are piling up, making for an existential threat, that would make sense, but they are not. They haven’t lost money in any quarter since Q3 2010 and have good free cash flow. What has kept the stock moving lower is not the threat of bankruptcy or any losses, but a lack of growth. Both sales and profits have been declining for a while but those declines have stabilized somewhat recently.

What really makes M appealing right now in a contrarian sense is the degree of negativity that surrounds the stock. Yesterday, they reported a beat of earnings expectations and guided profit for the full year higher than The Street was expecting. Either or both of those would normally push a stock higher, but after an initial pop, the stock still finished the day in negative territory.

As I said, that negativity is understandable, but it looks way overdone. Wall Street has been down on the stock for a long time. Macy’s have beaten consensus estimates for seven straight quarters now, suggesting that earnings expectations are overly pessimistic. That in turn means that positive surprises won’t be hard to come by.

As always with this type of trade, there is significant risk. Negativity of the duration and extent that has surrounded M can be remarkably resilient, and often continues long past the point where the evidence suggests it is mistaken. That means that even those who see Macy’s as a long-term investment rather than a trade should use one traders’ technique and place a stop loss order after buying.

If we continue to fall below $20 and stay there, then no matter how much value is in the stock it would be foolish to hang on and hope. I would, therefore, look to sell if we hit somewhere around $18, but with that sensible precaution in place. Buying M at these levels offers enough upside to make for a decent trade.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.





This article appears in: Investing , Investing Ideas , Earnings , Stocks
Referenced Symbols: M




More from Martin Tillier

Subscribe






Contributor:

Martin Tillier

Markets, Bitcoin












Research Brokers before you trade

Want to trade FX?