Two Retail Stocks Swarmed by Hedge Funds

General Growth Properties and Macy's are hotbeds of hedge fund activity, perhaps signaling big gains in the months ahead.
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BOSTON (TheStreet) -- Economic pessimism is hurting retail stocks as they head into the critical back-to-school shopping season.

Most investors are wary of these stocks, but some money managers are scooping up shares. John Paulson of

Paulson & Co.

and David Tepper of

Appaloosa Management

, who both earned windfalls on financial investments in 2009, added retail bets during the second quarter, according to Securities and Exchange Commission filings.

Paulson initiated a position in

General Growth Properties

(GGP)

of 6.6 million shares, equaling 2.1% of shares outstanding. Other hedge funds are flocking to General Growth.

Pershing Square Capital Management

, run by Bill Ackman, owns 7.6% of the float. Its bet was unchanged in the second quarter, but

Blue Ridge Capital

, headed by John Griffin, increased its stake by 500,000 shares to 2.4%. Hedge funds

Och-Ziff Capital Management

and

Omega Advisors

also increased their equity stakes in the latest reporting period.

General Growth is a real estate investment trust that owns shopping malls in 44 states. It filed for bankruptcy in April 2009 and expects to reemerge in October with fewer debt obligations. General's second-quarter loss shrank by 26% to $118 million, or 37 cents a share, from $158 million, or 51 cents, a year earlier. Revenue inched up 1.7% to $822 million. The gross and operating margins widened from 29% to 34%. Tenant sales at comparable properties gained 7.8% in the quarter, a positive sign for future rental rates.

Of analysts covering General Growth, none advise purchasing its shares, two recommend holding and one suggests selling them. They trade at a sales multiple of 1.4 and a cash flow multiple of 6, 79% and 65% discounts to financial services industry averages. The stock has a beta value of 4.1, which means it tends to magnify market swings.

Fairholme Capital's

Bruce Berkowitz, whom

Morningstar

named best U.S. stock mutual fund manager of 2009, owns General Growth debt in a position with an estimated value of $2 billion.

David Tepper initiated a position in

Macy's

(M) - Get Report

of more than 4.9 million shares, equaling 1.2% of shares outstanding. Other hedge funds are long Macy's shares.

Maverick Capital

, run by Lee Ainslie, is the fifth-largest investor with 3% of the float. Ainslie added 254,243 more shares to his bet in the latest reporting period. Quantitative-oriented

D.E. Shaw & Co.

enlarged its stake to 2.2% in the second quarter.

Citadel Advisors

and

SAC Capital

more than doubled their bets to 1% and 0.9% of shares outstanding, respectively, in the latest quarter.

Macy's is a high-end department store chain that also owns the Bloomingdale's brand. Second-quarter profit multiplied to $147 million, or 35 cents a share, from $7 million, or 2 cents, a year earlier. Revenue increased 7.2% to $5.5 billion. The operating margin widened from 5.5% to 6.7%. Same-store sales increased 4.9% during the second quarter. They gained an impressive 7.3% in July. Online sales, included in same-store figures, soared 28% in the second-quarter and jumped 22% in July. Macy's has $1.2 billion of cash and $8.1 billion of long-term debt.

Of researchers following Macy's, 10, or 59%, advocate purchasing its shares and seven recommend holding them. None rate Macy's a "sell." A median target of $26.15 suggests a return of 24%. Bullish forecaster

Citigroup

(C) - Get Report

predicts a rise of 56% to $33.

Soleil Securities

expects a gain of 47% to $31. Macy's stock sells for a forward earnings multiple of 9.5 and a cash flow multiple of 5.4, 35% and 68% discounts to peer averages. Its PEG ratio, a measure of value relative to predicted long-run growth, of 0.1 signals a 90% discount to estimated fair value.

-- Reported by Jake Lynch in Boston.

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