by Travis Johnson, Stock Gumshoe | February 9, 2016 2:44 pm
That quote in our headline comes from Bret Jensen, who runs the Blue Chip Gems newsletter put out by Investors Alley (he also has a Biotech Gems letter and a Small Cap Gems letter, with sector focus that you can probably guess at by their titles).
We’ve looked at a couple of stocks he has teased since launching his first newsletters in 2014, and those haven’t particularly compelling performers… but today’s pitch is, to be fair, much different (past picks were “story” stock RICK and its breastaurants, which has been just plain weak, and biotech EGRX, which did shoot up last year before falling back to a loss).
Today it’s blue chips and “Forever Stocks” that Jensen is looking for… and, well, that seems to be one of the few notions that investors are finding comfort with during this recent time of turbulence, the idea that if everything is dropping in price we can, at least, buy the best companies with strong dividends at cheaper prices and batten down the hatches for whatever comes our way.
So what does he think we should buy? Here’s how the ad gets us started:
“Exactly one year ago, I launched Blue Chip Gems to connect my readers with a cross-section of financially fit companies best suited to weather the inevitable storms (like the one we’re in now)… and prosper from the good times.
“This new advisory meets the needs of a large but often silent majority…
“Conservative investors. Those who value safety first and foremost.
“My sweet spot? Profitable mid- to large caps that dominate their niche (or will soon).
“My Forever Stocks system zeroes in on firms most likely to outperform their peers for 12 to 36 months, at least. I’ve had staggering success in identifying blue chip juggernauts that issue ‘royalty checks’ to shareholders — year after year.”
And then we get into the specific hints for the “#1 Forever Stock” ….
“Introducing My #1 Forever Stock for 2016
“(Quite frankly, this single buy could easily become your best-performing stock for the next decade.)
“Now for my #1 screaming buy of the new year…
“This is one of those precious moments when an exceptional player in a lucrative industry can be had for a song.
“This below-the-radar company is extremely healthy. Top-line sales and revenue are robust. The company is on pace to deliver more than $1 billion in profit this year.
“Plus their extremely generous dividend yield (currently 4%) provides a very large margin of safety for new investors.
“Yet my analysis shows that shares could be undervalued by 50% or more. I conservatively estimate their share price will DOUBLE from its current level of around $40 over the next 12 months.”
Sound interesting? Dividend and a possible double? Interesting enough to keep sniffing around, at least … some more hints from Jensen…
“My #1 Forever Stock has 823 locations operating in high-rent districts in the US and beyond. I’m sure you know them – you may have even strolled down their aisles of luxury clothing, jewelry, perfume and high-end homewares….
“… even though I’ve introduced my top Forever Stock as a retail play…
“It really isn’t. It’s morphing before our eyes.
“Have you heard the term ‘omnichannel’ before?
“It’s literally transforming how our #1 Forever Stock does business. And it’s the main reason this company will dominate their niche over the next 10 years.”
OK, so… strong retailer, good omnichannel presence, 4% dividend… any other clues?
“Our #1 Forever Stock already offers same-day delivery in 17 markets total.”
Pretty cool, though I suspect no one will ever make same-day delivery profitable outside of New York City and maybe a couple other mega-cities. Not even Amazon. More?
Yes, we get one of our favorite words: Catalyst! Not only does he think it’s cheap, which sounds lovely, but he thinks there’s a reason why it should soon become not-cheap.
“Will $21 BILLION in Land Value Get Paid Out in Dividends – or Via a Quick Share Price Hike?
“Here’s the kicker — why I chose this very moment to write to you.
“Luckily, the news I am about to share is still ‘secret’. It’s only recently bubbled up. No other investment advisor or Wall Street source that I know of has picked it up… yet….
“We can talk about mobile strategy and the digital revolution all we want. But according to Forbes, the reality is that 94% of retail sales are still rung up in physical stores….
“I’M PLEASED TO REPORT THAT OUR #1 FOREVER STOCK RETAILER IS SITTING ON A VIRTUAL GOLDMINE!
“Heck, even low estimates for the company’s premier real estate holding in the Big Apple put its value near $3 billion. Some appraisers go even more than $4 billion.
“What would happen if they aggregated all their valuable real estate holdings into a real estate investment trust (REIT) to unlock shareholder value? Experts have thrown out numbers hinting that their combined real estate holdings alone are worth $40.00 to $60.00 a share, and that would be on top of to the stock’s current share price. A true life changer for anyone holding this stock right now.”
So who is he teasing as his “#1 Forever Stock for 2016?” This is, sez the Mighty, Mighty Thinkolator, Macy’s (M).
Which is indeed sitting on a real estate gold mine, including their flagship store in Manhattan that some analysts do believe is worth $4 billion. But saying that this is “secret” is a bit disingenuous, a high profile activist fund (Starboard Value) went public with their recommendation that Macy’s spin out their real estate into a REIT last Summer and that pressure helped the stock hit a new all-time high of $71 in July, and Starboard reiterated that argument with a new presentation last month that you can see here, it goes into much more detail about possible “unlock value” strategies.
The shorthand version of that argument is that Macy’s owns hugely valuable real estate, and that because of this “locked up” real estate value the company is effectively valued as if their core retailing operations, including their credit card business, are valued at a negative $10 billion (despite being profitable).
Macy’s response so far, generally speaking, is “you don’t get it” — partly because it seems that a substantial part of their financial flexibility comes from owning that real estate. They’ve already announced some store closings and redevelopments over the past six months and may well close or sell more of their non-core properties, but there’s no indication that they want to spin off all of their real estate and saddle the operating business with what would presumably be substantially higher operating costs (they’d then have to pay rent to the REIT, of course).
But the company is actively trying to improve operations, including the focus on “omnichannel” retailing, and they are selling some real estate here and there, paying a good dividend, and buying back shares to try to increase per-share value.
Starboard, at the time of their purchase, indicated that they thought Macy’s could be worth $125 a share if they followed the REIT spinoff plan, but that marked the peak for the shares and they have trended down pretty sharply for the last six months — the latest blows were their “terrible” holiday shopping season and a warm early winter that depressed, or at least delayed, winter fashion shopping, but that was also on top of a bad third quarter.
Late in the year, David Einhorn also got on board this stock — and his disclosure of a M position for Greenlight Capital helped the stock to bounce off the bottom in the mid-$30s a little bit last month. Here’s the comment from Einhorn’s 2015 letter to shareholders:
“We established a position in Macy’s (M), the operator of about 900 Macy’s, Bloomingdale’s and Bluemercury stores, at an average price of $45.69. Earlier in 2015, with the stock at $70, an activist argued that the store real estate could be separated to unleash a valuation in excess of $125 per share. Management determined a whole-company REIT wouldn’t provide the required operational flexibility. Now, with the stock closing the year at $34.98, the math might make more sense. While it’s unlikely that management will reverse course on its own, it wouldn’t surprise us if a private equity firm teamed up with a REIT to buy the company and unlock the value privately.
“Even if this doesn’t happen, the shares are cheap at 5x EBITDA, 7x equity free cash flow, and less than 9x 2015 EPS, with a healthy balance sheet and strong history of share repurchases. We think a portion of the recent sales weakness was driven by unseasonably warm weather and a strong dollar impacting tourist business, which should set up for favorable comparisons in 2016.”
That seems pretty reasonable — and if we throw in the dividend, which is actually 3.6% currently, and the dividend growth (the payout has increased by 600% in the last five years). But, of course, it’s still an operating company and it has to operate well — the valuation is very nice right here, I can easily see the compelling value… but if sales suffer, it might stay at a low price and remain a “compelling value” for a long period of time, or eventually wither like past national department store retailers.
The risks are substantially less with the stock trading at what really has to be considered a depressed level for a strong and historic brand with good management and excellent assets, but certainly that doesn’t mean there’s no risk. Investors don’t like to own companies whose sales and earnings are falling, as Macy’s did last year, and if no one much wants to own your stock and you’re not doing anything compelling to create value (like selling real estate), it’s hard to see the price jump from here. Starboard value did have quite a bit of success in pursuing a similar strategy with Darden restaurants last year, but I think Macy’s is quite a bit larger and more complex… and, until recently, not necessarily in the kind of trouble that would make them pursue a risky new strategy.
I hadn’t looked at Macy’s before today, and I’m inclined to keep looking into it — with about $8 billion of debt balanced against possibly $20 billion of real estate assets ($6+ billion of which is in just a few of their best downtown locations) the downside should be pretty limited unless shopping malls really do die off (most Macy’s and Bloomingdale’s stores are in shopping malls, including more than 400 where they own their chunk of the mall), they really aren’t getting any credit for their success as an operating retailer. They report in two weeks, so the story could change fairly rapidly if they alter their course or surprise in some way… but we already know that the fourth quarter was weak on the sales front.
If you think that department store shopping is dead and that Macy’s can’t compete with Amazon or whoever else, this stock obviously won’t have much appeal… but if you think they’re just in stasis and holding their own trying to evolve with the marketplace, and have a decent chance of surviving and returning to sales and/or earnings growth, then the shares are almost certainly too cheap. There’s risk, but my first impression is that the reward is greater than the risk with M at $40 or so. There’s no growth right now, but at this valuation there doesn’t have to be a lot of growth (there does have to be some, but it’s cheap enough that one could arguably wait for it).
Jensen’s got two other “forever” stocks he teases, too, though not in much detail — I’ll dig into those and see if I can get you some answers tomorrow. In the meantime, if you’ve got an opinion on Macy’s, well, I’m sure we’d all like to hear it… just use the friendly little comment box below.
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