Macy's (M) has run over the past month or so close to in-line with many retailers, while the rest of Rome has burned down. The name trades at 10.4x forward-looking earnings, suggesting a below-average valuation through that metric in relation to its peer group. Cash flow is there. So is debt, a lot of debt. The firm's Current Ratio does imply that it will not run into a jam at some point should cash flow stay on track.
I am not in love with Macy's. I did make some money on the long side earlier in the year. I am tempted to short this one almost as much as I am to buy it, but that dividend. I hate chasing stocks that run into earnings. Then again, should an investor hang onto this name long term, the 4% yield will knock $1.51 off of net basis every year. Not too shabby for a $37 stock.
Industry expectations are for EPS of $0.14 on revenue of $5.4 billion. Whispers are running to the high side, not that this means much in November of 2018.
The Macy's Tough Environment Trade (minimal lots):
This is the game. From the chart, it is clear that the guys writing the algos that run this name respect standard Fibonacci levels. That means the short-term upside runs to about $42, the downside as far as $32, with a last sale smack dab in the middle. Okay, how to get involved, and stay hedged? I have an idea. Macy's will report again in late February. Let's use that to our advantage.
--Purchase 100 shares of Macy's at or close to the last sale of $37.05.
--Sell one February Macy's $42 call (last bid: $1.37)
--Purchase one November 23rd $32 put (last offer: $0.43)
Macy's will pay a $0.38 quarterly dividend on January 2 to shareholders of record on December 14.
1) The options trades result in a net debit of $0.94. Add to that the dividend payment, and the trader has reduced net basis all the way from $37.05 to $35.73.
2) The trader gained this leverage by allowing gains to be maximized through February at a market price of $42 (or a net profit of 17.5%).
3) The trader has also hedged his position through next Friday (post-earnings) by purchasing the put, which is fully paid for by making the other transactions. Of course, now that trader will never see the dividend payment -- taking net basis back up to $36.11. Max loss by next Friday: 11.4%.