MorningWord 9/21/15: A Post Parade Mess – Macy’s ($M)

by Dan September 21, 2015 9:28 am • Commentary

On Thursday (here) we took a quick look at the recent performance in the U.S. retail sector, with the following observation:

To say that it’s been a stock-pickers market in the retail space in 2015 has been an understatement. Walmart (WMT) down 25% ytd, while Target (TGT) is up 3.5%. Under Armour (UA) up 55% and Lululemon (LULU) down 3%. Kroger (KR)up 17% and Whole Foods (WFM) down 33%. Macy’s (M) and Khols (KSS) down 15% and TJ Maxx (TJX) up 6% ytd. You get the point. There have been plenty of good reasons for the disperse results, secular shifts in businesses, dollar exposure, financial health of different sorts of consumers, but the fact of the matter is, it’s been hard to just paint the entire sector with the same brush as the XRT (the S&P Retail etf) is down 1% on the year, and down 7.5% from its 52 week high made in March.

At the time we were looking at the potential for TJ Maxx (TJX) to re-test its all time high made on August 17th.  Interestingly another U.S. retailer, Macy’s (M) was also trading at an all time high on August 17th, but has since declined 26% and on Friday closed at a new 52 week low:

M 1yr chart from Bloomberg
M 1yr chart from Bloomberg

There are few more bearish set ups than 52 week highs to 52 week lows in a very short period of time, the way Macy’s has done in the last month.  Especially for a company that does not face the same headwinds of competitors with loads of international risk (think strong dollar) and exposure to emerging markets. Despite Macy’s stated desire to explore online sales opportunities in countries like China, the company currently gets 100% of their sales from the U.S.

So what gives with Macy’s?? Why is this not the Fortress America trade?  The company has stated on more than one occasion of late that 2015 will be a transition year.  

So the stock trading about 11x next year’s expected earnings is cheap to itself and most large cap peers.  Investors have all the sudden started to price in some unforeseen downside despite the company’s statements that the transition is due to investments that will pay off in the near future.

Macy’s eps troughed in 2009 at $1.49 on sales of about $24 billion. At the time the stock was in the mid single digits.  In the current fiscal year consensus estimates call for about $4.55 in earnings on about $28 billion in sales. The stock traded as high has $73.60, and closed Friday at $54, without any new news since their fiscal Q2 results on Aug 12th.

So the question investors need to ask is quite simple. Are technicals and price action foretelling some unforeseen evil?  A real problem is the stock’s recent break of the uptrend that has been in place since late 2008. It had held it LIKE A BOSS in a near perfect 45 degree angle until just recently:

M 8yr chart from Bloomberg
M 8yr chart from Bloomberg

So what to do? If we are truly seeing the end of the 6 year bull market, then cheap gets cheaper. It’s that simple.  In bull markets, optimism about upward earnings revisions means multiple expansion, in what could be an emerging bear market it makes sense to take the cues from price action and technical breaks. And suddenly Macy’s price action and technicals are awful.

So I’ll leave you with a question I learned long ago and apply it to the Macy’s chart. Q: What do you get when you try to pick bottoms?  A: Stinky Fingers.