Overlooked Potential Makes This Retailer a Screaming Bargain

While investors are hyper-focused on retailers this time of year, I see an overlooked opportunity in a prominent department store chain.

Macy’s (NYSE: M) popped 8% on July 15 when activist investor Starboard Value announced an undisclosed stake and plans to push for a spinoff of the company’s real estate properties into a real estate investment trust (REIT). 

The month before, Macy’s CFO Karen Hoguet cooled REIT rumors, saying the company preferred to control its locations. But investors continued to hold out hope, as similar strategies had sent shares of companies like Sears Holdings (NASDAQ: SHLD) and Darden Restaurants (NYSE: DRI) skyward.

But those hopes were dashed when third-quarter results were released earlier this month. Management expressed its opposition to a spinoff and lowered its full-year outlook — a one-two punch that sent shares plunging 14% in one day.

With REIT speculation dead and short-term traders shaken out, the shares look like a great bargain.

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Real Estate Still Holds a Great Deal of Promise

Starboard estimated Macy’s real estate holdings at $21 billion this summer, which is nearly double the company’s market cap of $12.7 billion. While management has taken the REIT idea off the table, that doesn’t mean they aren’t planning to monetize their properties. Already this year, Macy’s sold locations in Seattle and Brooklyn and hired a developer to help formulate a real estate strategy.

At the beginning of the year, the company owned 447 of its 823 stores under the Macy’s and Bloomingdale’s name, including flagship stores in New York, San Francisco and Chicago. The Herald Square store in Manhattan is the largest department store in the United States and a major tourist destination.

Macy’s knows it has strong value in these locations, and I would not be surprised to hear plans to unlock more of it over the next few months through partnerships, the closing of unprofitable stores and outright sale of locations within its massive portfolio.

Retail Remains Strong

Beyond the upside on real estate monetization, the company is still one of the most respected brands in high-end apparel. The retailer is also courting discount shoppers with its off-price format called Macy’s Backstage, which debuted recently and holds potential for revenue growth.

Macy’s boasts a competitive moat. Twenty percent of sales come from its own private label and another 20% comes from brands on which it has an exclusive agreement. That means nearly half of sales come from items shoppers can’t find anywhere else. Furthermore, Green Street Advisors reports 80% of Macy’s mall stores are in the country’s highest grossing malls. 

Although growth in the entire apparel category has slowed this year, Macy’s weak third-quarter results were due in part to temporary factors. A temperate fall season delayed shopping for winter apparel and strength in the U.S. dollar limited international tourism, especially to the company’s iconic Manhattan store. 

While shares have rebounded slightly from the overdone sell-off following that report, they still represent a great value and present an opportunity for profits.

Earn a 23% Annualized Return Without Ever Buying Shares

Shares currently trade for just 9.5 times the midpoint of management’s revised full-year EPS guidance of $4.20 to $4.30, compared with a five-year average multiple of 14.4.

It’s difficult to say how quickly management will move to unlock real estate value, but they have disclosed the beginning of talks around joint ventures and other deals for four flagship assets, so it may not be long. I want to take advantage of this potential upside catalyst while still limiting my exposure in the shares. 

In fact, with the strategy I have in mind, Macy’s doesn’t even need to move higher for us to profit. Specifically, I plan to sell put options on the stock.

I know that is enough to make some of you stop reading, but please hear me out. Unlike many options strategies, selling puts is actually a conservative technique, and it’s so simple almost anyone can do it. 

We just created a video that shows how our 32-year-old customer service rep — who has no real trading experience — made $274 in two minutes. Before you make up your mind about selling puts, please watch this. 

With M currently trading for $40.38 per share, we can sell the M Jan 38 Puts for around $1.18 per share ($118 per contract). If M closes below the $38 strike price at expiration on Jan. 15, we will be assigned shares at that price. Since we received $1.18 in options premium, our actual cost basis is $36.82 per share, an 8.8% discount to the current price. 

We want to make sure we have enough money in our account to cover this potential obligation. This means setting aside $3,682 for every put contract we sell — $3,800 for 100 shares minus the $118 we collected from selling the puts. 

But if M is above $38 on expiration, we keep the premium for a 3.2% return in 50 days. This works out to an annualized return of 23% without shares even having to move higher.

The options will expire before the company releases its fourth-quarter earnings. This may give us the chance to sell another put contract before any significant news is released. I like the value in the shares and would continue to sell puts with a strike price up to $50 per share.

Note: Earlier I mentioned how our customer service rep and trading newbie used this strategy to pocket $274 in two minutes. After three years of listening to customers rave about how much money they were making — $800, $2,000, even $5,700 or more every month — she had to try it. If you’d like to do the same, I urge you to watch this video.