Although I have never written about Macy’s (M, Financial), I included the stock in my “Best Idea Contest Portfolio” for 2016. As of now, Macy’s has proven to be the best performing stock of my portfolio, and I think it can continue moving higher.
The primary reason why I am bullish on Macy’s is because of its real estate assets. Activist firm Starboard Value estimates that Macy’s real estate assets are worth roughly $21 billion. As a result, various rumors have been circulating about Macy’s spinning of its real estate assets. If it does happen, it could unlock great potential for Macy’s investors. Given the recent development, I think the chances of that happening are pretty high and also, I believe Macy’s is undervalued, which is why I think investors should add it to their portfolios.
Undervalued
Due to the weak sales trend in the retail industry, Macy’s has witnessed a decline in sales over the last few quarters. Although the decline has been bad, it doesn’t justify the 40% drop in Macy’s share price within a few months.
As of now, Macy’s is trading at 13.5x trailing earnings and has a market cap of just $13.6 billion. The stock is definitely cheap especially when you throw in the potential of its real estate assets. In addition, Macy’s also has a juicy dividend yield of 3.31. Patient investors can enjoy the generous dividend while waiting for the company to unlock the potential of its real estate assets.
Real estate expert William Lenehan, CEO of Four Corners Property Trust, a REIT, will join its board of directors next month. This clearly shows that the company is serious about making money from its real estate assets.
Although the company has already said it wouldn’t spin off its real estate business into an REIT, the company is definitely making moves to earn money from it. Rivals like Sears (SHLD, Financial) have already mined billions from their real estate, and I expect Macy’s to go down the same road soon.
Conclusion
Real estate can unlock massive potential for Macy’s investors. The company can use the money to stop the falling sales and strengthen its online business to fight off competition from online retailers. Moreover, given Macy’s undervaluation, the risk of downside is limited and the upside potential is huge. The risk/reward ratio is greatly in favor of Macy’s, which is why I would recommend investors to take a long position in the stock.
Disclosure: The author doesn’t have any position in the stocks mentioned in the article.
