It’s Time to Buy the Dip in Macy’s Stock … Again

In late May, I told InvestorPlace readers that it was time to buy the dip in beaten-up Macy’s (NYSE:M) stock. Over the following 10 days, Macy’s stock soared by 60%, on optimism regarding store re-openings and a rebound in consumer spending.

Why It's Time to Buy the Dip in Macy's Stock ... Again
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Macy’s stock has since given up a big chunk of those gains on fears that a recent spike in novel coronavirus cases and hospitalizations will derail the physical economy’s reopening process, and stunt the consumer spending recovery.

These fears won’t materialize. And as such, it’s time to buy the dip in the stock … again.

Here’s why.

A Persistent Recovery

I like to characterize the current U.S. economic recovery as “persistent.”

That’s because, for better or worse, a large portion of U.S. consumers have developed a sort of immunity to Covid-19 news. Just look at this chart from Google Trends. Despite the fact that Covid-19 cases and hospitalizations have been rising for about two weeks now, Google search interest related to “coronavirus” has simply continued to decline from its March peaks.

Why? A combination of factors. There’s some fatigue at play. There’s also some consumer apathy at play. The science has also shifted, with the CDC’s most recent best estimate pegging the death rate of Covid-19 at levels not much greater than the flu. Widespread social protests have also pushed people out of their homes and into big crowds again. There’s ample pent-up demand from consumers to travel again, go to restaurants again and other more social activities.

For all these reasons, the consumer-driven rebound in U.S. economic activity has shrugged off the recent rise in Covid-19 cases in June. Month-to-date:

  • Search interest related to travel agencies has been on a steady uptrend.
  • Search interest related to restaurantsbars and shops has also been on a steady uptrend.
  • Downloads of the Lyft (NASDAQ:LYFT) app have continued to rise.

Everywhere you look, things are just getting busier.

Clearly, it’s going to take more than a rise in cases to kill this economic recovery. It’s going to take private or public sector shutdowns, or a fundamental change in the science surrounding Covid-19.

I view both of those as unlikely to happen. Therefore, I view it as likely that today’s economic recovery persists for the foreseeable future.

Macy’s Is Still Undervalued

For the record, in normal times, I’m not a huge fan of Macy’s or Macy’s stock.

The company missed the boat on e-commerce. Management has failed to differentiate the brick-and-mortar business. What you’re left with, then, is an antiquated, increasingly irrelevant physical retailer, in a declining mall sector, with a lack of visibility to drive sustainable long-term growth.

But, these aren’t normal times. And Macy’s stock is simply too cheap to ignore here.

Despite its shortcomings, Macy’s is still a stalwart of mall apparel shopping. While demand for mall apparel shopping may gradually decline over the next few years, it won’t altogether disappear. Assuming Macy’s can leverage new multichannel initiatives to win over lost sales from bankrupt peers like Sears and J.C. Penney, the company’s sales trends should be able to stabilize in the 0-1% growth range over the next few years.

Against that mild revenue growth backdrop, margins should stabilize, too, and perhaps even rise some as management closes stores and guts the expense base.

If so, then my modeling suggest that $1.75 is a doable earnings-per-share target for Macy’s by 2025. Over the past 10 years, this stock has averaged a 10-times forward earnings multiple. Based on that average multiple and a 10% annual discount rate, $1.75 in 2025 earnings per share implies a fair 2020 price target for Macy’s stock of about $12.

That’s 70% higher than where shares trade today.

Bottom Line on Macy’s Stock

Macy’s is not a long-term winner, and it is staring at some huge headwinds thanks to the coronavirus pandemic.

Still, the stock is too cheap to ignore here, and those coronavirus headwinds are going to clear up over the next few months. Consequently, Macy’s stock is shaping up as a good “buy the dip” play on the American economic recovery in the second-half of 2020.

Shares could easily rip higher by 70% from where they currently trade. But, investors should enter this trade with one important understanding: this isn’t a “buy-now, hold-forever” type of stock. It’s a “buy-now, sell-once-Covid-19-is-over” type of stock.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.

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