(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Macy's Inc. (M) stock has soared in 2018, with shares rising by over 40%, but they have also recently fallen by 12% from their highs in early June. Now, options traders are betting shares of the stock will continue their decline, falling by an additional 8% from its current price of $35.50. If that should happen, shares would be more than 20% off their highs.
The technical chart also suggests shares of the stock may fall over the near term by an additional 7%. The bearish viewpoint likely stems from the bleak business outlook facing the retailer as it tries to fend off Amazon.com Inc. (AMZN) and other e-commerce companies. Revenue for Macy’s is not expected to grow over the next two years, while earnings are seen falling during the same period.
Options traders see shares of Macy's falling ahead of options expiration on Aug. 17. The number of bets the stock will fall at both the $35 and $36 strike prices heavily outweigh the number of bets that shares will rise by a wide margin. Open puts at the $36 strike price stand at 15,000 contracts, while the number of calls is at roughly 3,500. Some traders are betting shares fall to about $32.50 by the August expiration, using the $34 strike price, where there are 13,000 open put contracts. Those contracts cost about $1.50, and a buyer of the puts would need the stock price to fall to $32.50 to break even if the options are held until expiration.
The technical chart also suggests shares may fall in the coming weeks to about $33, where the next level of technical support rests. The relative strength index has even been falling in recent weeks, suggesting bullish momentum is coming out of the stock.
The outlook for the business looks bleak, with earnings expected to drop by roughly 11% in 2019, followed by a drop of over 2% in 2020. However, revenue is expected to remain flat, and that would suggest that costs for Macy's will be steadily rising over the next two years, negatively impacting margins, as the company tries to remain competitive in the face of a challenging retail environment.
Macy's stock has been hot thus far in 2018, but it seems increasingly likely that streak may be coming to an end.
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.