Macy's: For Value Shoppers

10/19/2017 5:00 am EST

Focus: CONSUMER

As Charles Dickens might say it is a good stock market, it is a bad stock market. It is good in the sense that there are good opportunities out there and we will reference them, asserts Russ Kaplan, money manager and editor of The Heartland Adviser.


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It is not so good since this market is overvalued and vulnerable to a normal correction. Corrections are a normal part of the stock market. In the end the investor who keeps calm and stays with good companies will likely win out.

We have often discussed the way stocks tend to overreact to news and this is the case with department stores. Yes, shopping online is a relatively recent development but it is here to stay.

In 2017, we have seen several retail stores file for bankruptcy, go out of business or be sold to competitors. There will still be additional store closings and consolidation in the coming years but people will still shop at stores. We think department stores stock prices have overreacted to this in 2017.


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One department store that we recommend is Macy’s. The stock is trading in the lower 20’s from a high of $73.60 in 2015. Macy’s has been adapting to the changing landscape and has built a good online presence to compete with Amazon and other retailers.

It is a profitable company with a 22.5% return on equity a dividend of $1.51 with a 7.04% yield. The price to earnings ratio of 7.36 is an indication of undervalued.

Some of the risks to our recommendation is the retail sector must undergo significant repositioning in the coming years. Macy’s will have to follow suit to remain competitive.

Macy’s closed 30 locations last year and may have to close additional stores in the upcoming years to remain profitable. Their profitability and margins have declined over the recent years, so changes will have to be made to turn that around.

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