Top Picks 2020: Macy's (M)

01/08/2020 5:00 am EST

Focus: CONSUMER

John Reese

Founder and CEO, Validea.com And Validea Capital Management

Although it is hard to see right now, if a few things line-up for Macy's (M) — our more risk-oriented stock selection for 2020 — the stock could have significant upside potential, explains John Reese, editor of Validea.

Here are the trends that need to emerge for this stock idea to do well for investors.

1) The value stock reversion needs to continue.

2) The economy and consumer need to stay strong and continue to spend.

3) Investors need to start to realize that although Amazon is a dominant force, some retailers will stabilize and those businesses can improve over time, making some of the beaten down stocks in the retail space great bargains at current prices.

To source this investment idea, I started using the quantitative screens and run 22 distinct investment models, ranging from strategies inspired by investing greats, like Warren Buffett and Ben Graham, to fundamental-based computerized strategies.

Using this system, we can screen the entire stock universe, keying in on sectors and specific names that meet many of our models’ investing tests simultaneously.

Right now, there are many retailers that are popping up on this list and while many of these retail names look very cheap, you want to be careful not to invest in a company that doesn’t have a good brand name and business and where there may not be a margin of safety if things continue to go sideways for the space.

Using our tools, the name that looks to be presenting a good opportunity for value investors is Macy's (M). Macy’s is a $5 billion market cap company and an anchor store in some of America’s top malls.

While this may not seem like great place to be, investors appear to have overdone it to the downside and in that is where the opportunity emerges. The stock passes three of our strategies with at least a 90% score and three more with a 70% score.

For example, the stock ranks in the 1st percentile using our Value Composite model based on James O’Shaughnessy’s value composite method, an approach that uses multiple value metrics and then ranks all stocks based on the composite score. That’s just one of many models that rank the stock highly.

In addition, the stock trades around $17/share, far below it’s 52-week high of $32. The company pays a nice dividend as well. You can buy this, get paid, and any slight improvement in the business should lead to healthy returns for Macy’s in 2020.

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