Macy's Undervaluation Will Help It Beat the Market Correction
Picking a stock to buy when the market sentiment is bearish is difficult. While I called Spirit Airlines (SAVE) my best long idea for 2016, I recently changed it to Macy’s (M). While I believe both Spirit and Macy’s are undervalued, I changed my best pick to Macy’s because of the company’s real estate assets.Macy’s has a market cap of roughly $12.5 billion, whereas the company’s real estate assets are estimated to be worth at over $21 billion.
Macy’s online business has been growing at a rapid clip and the company can further enhance it by selling some of its real estate assets and using the money to improve its distribution capabilities. Having a great online business works well for retailers as it appeals to Millennials, who now account for a larger population of the U.S. than Baby Boomers.
With trillions of dollars in spending power, getting of the right side of the Millennials can boost any retail business. Macy’s stock has been punished over the last few quarters due to the growing concerns regarding competition from online retailers likes Amazon (AMZN). However, Macy’s can monetize its real estate assets and improve its online business to fight off competition from the online retailers.
Moreover, a large portion of Millennials prefer visiting retail stores to online shopping. Hence, I believe the best way for a company to benefit from Millennials is by having both a good retail business and a strong online presence. Macy’s can definitely fight off competition from Amazon because of the presence of physical stores.
In my opinion, the stock has fallen down too much in a very small amount of time. Although Macy’s delivered a couple of bad quarters, it doesn’t justify its current undervaluation and it’s only a matter of time before the market realizes the stock’s true potential.
Macy’s is trading at just over 10x trailing earnings and has a dividend rate of 1.44%. While the undervaluation is clear, investors can also expect a big boost in buybacks/ dividends if Macy’s decides to monetize its real estate assets.
Given Macy’s undervaluation and high dividend yield, I think investors should add the stock to their portfolio. Macy’s real estate assets can unlock great value for shareholders and the stock looks dirt cheap at under $40. Moreover, as mentioned above, I think the combination of physical stores and a growing online business will help Macy’s fight off competition from e-commerce giants like Amazon. For these reasons, Macy’s is my new favorite stock for 2016.