An Insider Bought $300K Worth Of This Retailer
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David Clark, an executive vice president at Macy’s (NYSE: M), purchased a little over 7,100 shares of the company’s stock on March 14th at prices close to $42.20 per share. Clark had not owned any shares directly before this purchase, and only had about 1,600 shares owned indirectly through his 401(k) plan. As such he has increased his exposure to the fortunes of Macy’s and therefore his company-specific risk; economic theory holds that insiders should generally prefer to diversify unless they strongly believe that the stock is undervalued. This is our explanation for why stocks bought by insiders tend to outperform the market.
Macy’s ended its fiscal year in early February; the year was 1 week longer than the one which ended at the same point in January 2012. While revenue was up 5% compared to the last fiscal year, then, half of that sales growth is due to the extra week. Net margins remained about constant, so earnings were up only slightly on a per-week basis as well. While this isn’t particularly astounding performance, it is somewhat impressive that the department store may be growing its sales in spite of fierce competition from discount retailers including Wal-Mart (NYSE: WMT) as well as Amazon (AMZN) and other websites without suffering too much on the margin front. Net income did decline slightly in the fourth quarter of the fiscal year versus a year earlier.
At a market capitalization of $16 billion, Macy’s currently trades at 13 times trailing earnings (the P/E increases only slightly, obviously, if we account for the longer fiscal year). That seems about right to us given the combination of low growth rates and a healthy amount of skepticism that the company will even be able to continue that pattern. Analyst expectations, however, are for significant earnings growth in the next couple of years resulting in a forward P/E of 9 and a five-year PEG ratio of 0.9.
We track 13F filings from hedge funds and other notable investors as part of our work developing investment strategies (we have shown, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year and can also research which funds have large positions in Macy’s at the end of December. Lee Ainslie’s Maverick Capital increased its holdings by 33% during the fourth quarter of 2012 to a total of 7.5 million shares. Levin Capital Strategies, managed by John Levin, was also buying and reported a position of 4.3 million shares on its own 13F.
The closest peers for Macy’s are Dillard’s (NYSE: DDS) and J.C. Penney (NYSE: JCP). J.C. Penney, one of the largest holdings of billionaire Bill Ackman’s Pershing Square, has been having a much tougher time over the last year than Macy’s. The stock price is down 57% as sales have crashed and losses have remained heavy; the sell-side does not think that J.C. Penney will turn a profit either this year or next year. 45% of the outstanding shares are held short. Dillard’s, conversely, has been doing quite well: in its most recent quarter revenue was up 7% compared to the same period in the previous fiscal year, and wider margins contributed to 14% earnings growth. The trailing P/E is a very light discount to Macy’s at 12, and so it seems to be a more interesting value prospect on the surface.
Of course, we can also compare the department stores to Wal-Mart. The premium in terms of trailing earnings multiples is small, with the stock valued at 14 times trailing earnings. Despite the retailer’s massive size, growth on both top and bottom lines has been decent and exposure to the broader economy is somewhat limited at a beta of 0.4. As such we would be interested in considering Wal-Mart as well.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Dillard's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!