(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Shares of Macy's, Inc. (M) have increased by nearly 61% in 2018 but have stalled out since the middle of June. Now shares of the retailer are on the cusp of a significant breakout which may send the stock higher by as much as 15%, based on technical analysis. (For more, see also: 'Retailpocalypse Is Over—Macy's a Bargain: Bulls.)

Despite the strong technical chart, the fundamental outlook for the business looks weak. Analysts are expecting the company to generate no revenue growth through the year 2021, and for earnings to decline. In fact, the average analysts' price target on the stock is $35.50, nearly 12% below the current stock price.

M Chart

M data by YCharts

Nearing a Breakout

Macy's stock has been trending higher since shares hit a low of nearly $17 in the fall of 2017. But the massive price rise has stalled out, and that has given the stock a chance to consolidate below technical resistance around $41. The uptrend line and the resistance level create a technical pattern known as a rising triangle, which is a bullish continuation pattern. Should shares breakout and rise above resistance, Macy's stock could climb higher to its next level of technical resistance at $46.50, nearly 15% higher than the current price of roughly $40.50. 

The relative strength index is also starting to trend higher, and that would suggest that bullish momentum is moving back into the stock. 

 

 

 

Weak Outlook

The earnings and revenue forecast tell a story of stagnating growth and falling profits, as the cost for the retailer rise in its battle with e-commerce giant Amazon.com (AMZN). Revenue growth is expected to be non-existent through fiscal 2021. Revenue is forecast to increase to $25.16 billion by 2021, from $24.93 billion in fiscal 2019. Even worse, earnings per share are forecast to decline to $3.41 in 2021 from $3.86 in 2019. 

M Annual Revenue Estimates Chart

M Annual Revenue Estimates data by YCharts

Sinking Margins

Gross profit margins have been declining since peaking in 2011 at nearly 41%, by the end of fiscal 2018 they sat at only 39%. The analysts' forecast of flat revenue and declining earnings imply more margin erosion in future years. (For more, see also: Macy's Holiday Sales Update Leaves Investors Cold.) 

Sometimes the technical charts and the fundamentals do not always line up. Perhaps the current scenario in Macy's is a sign the market is looking for Macy's' outlook to take a positive turn, while the analysts play a game of wait and see. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance. 

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.