Top Picks 2018: Macy's (M)

01/04/2018 5:00 am EST


Our selection for a growth company is Macy’s (M), a growth oriented pick for 2018, notes Russ Kaplan in Frank, Fox & Hoagstrom’s Heartland Advisor.

With the rapid growth of online shopping, department stores have taken a drubbing over the past few years.

They are perhaps the most unpopular segment of the stock market. Our current selection, Macy’s is indeed a department store and we like it for a number of reasons.

First of all, we think that there is a future for department stores and for the better ones such as Macy’s. The sharp reduction in the stock price is way over done. Back in 2015, Macy’s sold as high as $73.60.

Today it is selling at a recent price of $25, which is a massive drop. To us this represents an overreaction and makes Macy’s a wonderful buying opportunity.

The fundamentals of the company are sound, and according to our measures of values Macy’s is undervalued. For example, the price/earnings ratio on the stock is 11.

As a reaction to the emergence of online selling, Macy’s has reacted to its own online shopping capabilities and so far this has been proving fruitful.

The combination of department store sales and online shopping has shown an excellent return on equity of 22.5%. This is not reflective of a company that is going out of business.

Besides its profitability, Macy’s is sitting on expensive real estate, which we think is greatly under reported on its financial statements. This is especially so with its flagship Manhattan property.

For those of you who are interested in income, Macy’s pays an astounding dividend of 5.84% and is unlikely to be cut. All and all we think Macy’s has the potential for excellent growth in the future.

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