Macy's Soaring Stock Seen Rising 11% Higher

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

Macy's Inc. (M) shares have soared in 2018, rising by nearly 30%, easily beating the S&P 500's return of only 2%. Options traders are betting shares of Macy's rise even higher, based on the options set to expire in July, by another 11%, taking the stock to nearly $37. But the longer-term outlook for the stock suggests any short-term rally may not last given the company's poor growth outlook, despite its cheap earnings multiple. 

Macy's fiscal first-quarter results came in much better than analysts had forecast, with earnings topping estimates by nearly 35%, at $0.48 per share, while revenue estimates beat results by only 2.8% at $5.541 billion. Shares of the stock have rallied by nearly 10% just since reporting results May 16. 

M data by YCharts

Bullish Options

Options traders are betting shares of Macy's rise to about $36.70, up about 11.2% from its current price of around $33, by expiration on July 20. The $36 strike price has nearly 16,000 open calls and cost about $0.70 per contract, giving them a breakeven price of $36.70. The calls traded about 15,500 contracts on May 22. 

The long straddle options strategy implies shares of the stock rise or fall by about 10.9% from the $33 strike price by expiration. It places shares of Macy’s in a trading of $29.50 to $36.60. The number of puts and calls are minimal at that strike price. 

Strong Technical Chart

The technical chart also suggests that shares of Macy's may continue to rise. The stock had recently refilled the gap created after dropping in January 2017 and is currently resting at a support level around $33, with resistance presently around $34.75. But there is a powerful uptrend in place, and that should continue to help push shares higher over the short-term. 

Weak Fundamentals

The biggest problem Macy's stock will continue to face over the longer-term is the weak fundamentals of the business. The stock trades at only 9.6 times fiscal 2020 earnings estimates of $3.41 per share. But that low earnings multiple reflects the fact that earnings are expected to fall by 10.6% while falling another 6.7% in fiscal 2021 to $3.19 per share. Revenue growth is forecast to fall from fiscal 2019 to 2021 from around $24.9 billion to $24.6 billion.

M Annual EPS Estimates data by YCharts

The better-than-expected first-quarter results are reason enough to get the bulls excited over the short term. But whether the momentum can continue over the longer term will be determined by the success of the company’s business. 

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 holdings. Information 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.