“Introducing My #1 Forever Stock for 2016” (Blue Chip Gems)

by Travis Johnson, Stock Gumshoe | February 9, 2016 2:44 pm

Who does Bret Jensen like for a 4% yield and possible double from $40?

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” ….

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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.

“Surprise Catalyst:

“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….


“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[1].

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.

  1. you can see here, it goes into much more detail about possible “unlock value” strategies: http://www.starboardvalue.com/publications/Starboard_Value_LP_Presentation_M_01.11.16.pdf

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  1. Avatar
    Deborah Flynn
    Feb 9 2016, 03:20:23 pm

    Macy’s like all retailer that get into the political personal agenda business ultimately fail. ONCE they threw Trump out of their stores they alienated a bunch of fellow New Yorkers whether we liked Trump or not he IS MR NY. That being said I could see trump Trumping them to get even. I think he can no matter what their balance sheet. It isn’t about Ties folks it just isn’t about Ties. I’ll pass I think Trump is mightier than Macy’s if he wants to get nasty.

    • Avatar
      Jon O'
      Feb 9 2016, 06:05:53 pm

      Trump is an unequivocal moron. Macy’s was wise to dump him. You never know what’s going to come out of that fool’s mouth. I own some of his products and am conservative leaning, and I can’t for the life of me understand how so many people can let such a dope play on their anger so easily. Mind boggling.

      • Avatar
        Steve Isaksen, Capt, USAF
        Feb 9 2016, 06:59:57 pm

        You should keep YOUR opinions about TRUMP (or anyone else, for that matter) to yourself. This is an INVESTMENT FORUM, not one where knuckleheads like you can espouse your own political agendas. Our country has been run by career politicians – how’s THAT been working for the USA? Not good, by most counts. Look at the debt, health care, entitlements (NOT social security – we earned that), borders, illegal immigration, illegal executive orders, non-enforcement of existing laws, weakened military, weakened US, I could go on. Hope and change: now THAT’S mind boggling. Well placed anger is well used anger. I live in an America I no longer recognize, and I want it back.

        • Avatar
          Nu yawker
          Feb 9 2016, 07:25:11 pm

          Capt, you are right about mentioning Trump on this forum. After all, he inherited all his daddies money and has gone Bankrupt 3 times. What is he doing on an investment forum? He bought the plaza for 300 million and then sold it for 200 million. Do the math

          • Avatar
            Mark Francis
            Feb 22 2016, 05:50:50 pm

            Wow , You are one of those “useful idiots” out there that keep the “Main Stream Media’ & the inept politicians in business. Do us a favor either wake-up or find another country.

        • Avatar
          Rob W
          Feb 9 2016, 07:42:29 pm

          Can’t help but say although maybe not the place for political comments, what you wrote was well said, very true, obviously from the heart from someone who truly feels like many in only wanting to see America be the great country it was, still is, and wanting it to be so much better. In any matter, thank you sir for your service.

        • 887 |
          Feb 9 2016, 07:47:19 pm

          Thank you for your service to our country, Capt. Isaksen. Because of people like you who serve, we still enjoy the right to vote in and vote out our political representatives in this great country. I’m sure people that have been voting over the last 25 years (on both sides of the aisle) would agree that 8 years is a loong time, and change often can’t come soon enough. Hope to see you on the Clubhouse thread sometime soon. It’s always lively over there, and a welcome distraction lately from a pretty brutal market.

        • Avatar
          James Fitzgerald
          Feb 9 2016, 08:17:49 pm

          CPT Isaksen,
          I understand your feelings, and I am sure many share them. I am sure most Vets share your concerns for sure. I would encourage you to not go to far with your political views (hope and change is associated with the current POTUS) in such a public way, as the current POTUS has proven he has little to no tolerance for those who disagree with him within the military family. I know you know the guidance and rules, so not in any way chastising you, rather just asking you to consider the other side of what might happen. I am a retired from the military, and I no longer have to be concerned with that kind of thing, and as a matter of fact, I will not even use the current POTUS’s name in any way or fashion, as I am not a supporter, and believe he has hurt our country’s posture, especially our military men and women. I hope you will take my response as it was intended…just calling out to you to be careful with politics. (I realize you are not campaigning for anyone, or appearing in uniform to support a candidate)

          Take care…thanks for caring and serving our nation!

        • Avatar
          Len Safhay
          Feb 10 2016, 09:25:36 am

          “not one where knuckleheads like you can espouse your own political agendas.”

          Be a good idea to take your own advice, Capt. Knucklehead

    • Avatar
      C J Dunavent
      Feb 13 2016, 09:24:55 am

      Children, children, children now settle down and relax.
      After all your government is in total control of all our markets so relax and enjoy.

  2. Avatar
    'Arizona Slim' Major
    Feb 9 2016, 04:09:48 pm

    Zach Scheidt of Lifetime Income Report (part of Angel Pub), $49.00 per year is beating the same drum in the March 2016 issue. He has a compelling 6 and 1/2 page write up on Macy’s. He says it’s a possible $70.00 stock by year end. He credits their Real Estate holdings as a big reason both David Einhorn and Jeff Smith (of Starboard Value Fund) are interested in the big M.

  3. 39 |
    Feb 9 2016, 04:41:14 pm

    I have not assessed Donald Trump’s temperament nor his wisdom in attacking Macys should he decided to do so. Macys is not just a New York institution so I think Trump’s attempt would likely fail in the event Macys proves they can improve their performance and bottom line revenue. I vote for watching Macys closely and see if they take a turn to reduce debt increase net to edge up dividends.

    • Avatar
      Feb 9 2016, 05:17:08 pm

      Dear Travis,
      About a half century ago, I work in Macy’s as a Jr. executive. I have heard people in executive office talking about that Macy’s had denoted the Herald Square property to a non-profit organization to avoid Property Tax and leased it back from that non-profit organization at a very low rent. In that case, there is NO Real Estate in Macy’s book, never mind $3 billion or $4 billion.

      • 12477 |
        Travis Johnson, Stock Gumshoe
        Travis Johnson, Stock Gumshoe
        Feb 9 2016, 07:00:44 pm

        Haven’t heard that, I would think it would have come up in all the “real estate value” chatter over the last six months…. though I imagine it probably is a historic site under some code or another, maybe they get a break that way.

        I did see something about Macy’s exploring adding a skyscraper/tower to the Herald Sq location to “unlock” some of that prime real estate, but don’t know what they’ll end up doing.

        Most of the supposed real estate value is in the 400+ stores they own around the country, which together make up something like $12-15 billion according to Starboard’s estimates — but that value is much more ephemeral, I’d say, and dependent on being operated by a good retailer like Macy’s. Shopping center anchor slots probably aren’t particularly valuable on their own, particularly now when so many of them are vacant. The real crown jewels are the downtown stores in NY, Chicago, San Francisco etc, where maybe some new strategy could release a little of the value — building, redeveloping, adding space, adding tenants, selling some space, joint ventures, whatever. I wouldn’t count on that if you’re entertaining becoming a Macy’s investor, but I do think the real estate value adds some backstop to the shares at these lower levels — it would be awfully surprising, to me at last, to see the stock drop another 30% (though, yes, I’ve been surprised before).

  4. Avatar
    dave bender
    Feb 9 2016, 05:55:35 pm

    Every time I have followed up on these guy’s I’ve been burned. I think a blind drunken Monkey could pick better. I’m new here so let me know if I’m wrong and if they’ve had some successes.
    Dave B.

  5. Avatar
    Feb 9 2016, 07:32:34 pm

    Funny, back in the late 80s a Canadian real estate company (Campeau) bought Allied and Federated stores for their real estate value. Campeau leveraged the heck out of the two retailers and they eventually both ended up in bankruptcy. I think Federated bought Macy’s as it came out bankruptcy also and eventually renamed most stores as Macy’s while keeping the Bloomingdale’s name for a higher end department store to compete with Saks, Neiman Marcus, etc.
    I guess there are some that want history to repeat.

  6. 71
    Feb 9 2016, 08:02:44 pm

    Its very important for everyone to understand that Congress slipped a “fast one” through the appropriations bill that was passed and signed by Obama in December (before we faced another shutdown standoff). They signed into law that REIT spinoffs from existing businesses would no longer be considered tax-free spin-offs. Bottom line is the Treasury has been losing too much present and future tax proceeds from these deals (since REIT’s do not pay taxes provided they distribute 90% of their proceeds to investors), and I am not surprised there was bipartisan support, especially since this was happening shortly after Pfizer announced their tax inversion deal to be “acquired” by Allergan.

    Now the new law does not prohibit REIT spinoffs (that would probably be unconstitutional), but the transaction would not be tax free, and for the alleged billions that Macy’s land would be worth, you can bet there would be a very hefty tax burden to adjust the assets to fair value from their current basis, probably enough to rule this out completely as an option for most companies. Maybe that is why Einhorn tried to keep investors from bailing on his fund at year end (he gambled and lost big-time on Macy’s) by teasing them with the possibility of a private buyout in tandem with a REIT. Presumably that buyer would then keep the real estate and try to spinout the dept stores. But I doubt they would pay fair value even in that kind of buyout.
    So bottom line is invest in Macy’s if you believe they are under-valued based on their operating business and transition to omni-channel retailing, but don’t start “counting any chickens” from the eventual possibility of a REIT spinoff, by Macy’s or anyone else. Personally, despite the 50% selloff, I suspect there are still unknowing investors in the stock thinking the REIT spinoff might still be a long term possibility, so I will wait for them to demonstrate better online sales before taking a chance.

    • 12477 |
      Travis Johnson, Stock Gumshoe
      Travis Johnson, Stock Gumshoe
      Feb 9 2016, 09:03:30 pm

      Good point — maybe that’s why the latest Starboard presentation is about forming real estate joint ventures with outside investors/lenders instead of just spinning out the real estate directly into a REIT.

  7. Avatar
    Feb 10 2016, 12:31:53 am

    Since Bernie and The Donald just creamed everybody in New Hampshire tonight it is looking like this election year will be a crazy. Both are way different than the normal lot we are allowed to pick from. Hillary is probably going to be out of the race behind the email scandals so Bernie will win that ticket by default. From an investor standpoint Bernie is really scary!! I think the Donald might be exciting for investors. Who know… But I am like most folks in my neck of the woods just flat sick and disgusted with the last 8-years. I welcome the Donald… And I hope he can help make America great again like he preaches. As for Macy’s… Well… here in East Texas Walmart, Tractor Supply and NAPA are more popular places to do our holiday shopping. Anything we can’t get there we get from Ebay and Amazon. In other words, Macy’s is not that important to most of America.

    • 12477 |
      Travis Johnson, Stock Gumshoe
      Travis Johnson, Stock Gumshoe
      Feb 10 2016, 08:48:25 am

      I don’t know how popular Macy’s might be in different parts of the country, but close to half of the country lives in our 50 biggest urban areas — I think we all probably make a lot of assumptions about “most of America” that are overly colored by our personal circumstances and environs.

      • Avatar
        Feb 10 2016, 10:14:08 am

        Point taken Travis, but… who has a bigger parking lot Macy’s or Walmart? The media talking heads try to convince me over and over that “most of America” thinks Trump is just a side show and Hillary is a shoo in … “Most of America” folks in NH voted last night and said different.
        I have been a loyal follower and irregular member for several years now and you have been my hero many times over. Thanks Amigo..

        • 12477 |
          Travis Johnson, Stock Gumshoe
          Travis Johnson, Stock Gumshoe
          Feb 10 2016, 11:30:35 am

          Walmart is dramatically larger than Macy’s in most ways. I hate shopping at either, frankly.

  8. 12477 |
    Travis Johnson, Stock Gumshoe
    Travis Johnson, Stock Gumshoe
    Feb 10 2016, 09:33:31 am

    OK, everyone’s had their chance to jump in since someone mentioned the word “Trump,” and you’ve gotten your name-calling in on both sides. I’m cutting it off now — if you want to talk politics, please go the Clubhouse thread for politics, religion, etc. here.

    If you want to talk Macy’s, retail, value investments, or anything else that’s at all relevant, by all means keep commenting here.

  9. Avatar
    Karla E.
    Feb 10 2016, 12:21:12 pm

    I quit going to Macy’s at least a year ago. There were rarely any staff people on the sales floor to help, and most of the ones who were had bad attitudes. I guess I would too, if my employer expected me to cover multiple departments on the same floor. They have “sale” ads every other week, so I can’t take any of their pricing seriously. I won’t touch it unless they do spin off the real estate.

  10. Avatar
    Jim Baratta
    Feb 10 2016, 10:25:23 pm

    I wonder if there are any brick and morter retailers left who are still interested in selling merchandise instead of real estate. Macy’s sounds like it is going down The same path as Sears. Successful retailer’s have fresh well stocked assortments in modern up to date stores with helpful friendly associates who care because they are appreciated by the company and are paid a living wage. The problem today is many retailers are owned and run by hedge funds and bean counters instead of merchant’s who understand retail.

  11. Avatar
    Ralph Butler
    Feb 11 2016, 02:20:33 pm

    My wife buys items from Macy’s, mostly at the store but some online. She likes to shop there because of their designer quality clothes. She waits for their sales which they run on a regular basis. I think they have a good business plan but how can any company (not owned by Goldman Sachs) hope to stay profitable in the long term when the government does everything it can to make it more difficult for people to stay employed or run a business? Obamacare hasn’t yet been fully implemented and it’s already killing the economy.

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