Gene Marcial's Stock Picks August 4, 2009, 9:28PM EST

Marcial: Bargain Shopping with Macy's

The beleaguered retailer's shares look cheap to some analysts, who see profits rebounding as savings from Macy's restructuring kick in and the economy recovers

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Macy's—52-week stock price

By Gene Marcial

BW's Gene Marcial

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It's time to go shopping—the economic downturn notwithstanding—for shares of the nation's beleaguered retailers, and particularly Macy's.

"I am a big believer in the economic recovery, and from all indications, including the stock market's sharp rise this year, it is definitely on its way," says Larry Haverty, portfolio manager at Gabelli Global Multimedia Trust (GGT), which has been accumulating shares of retailers Macy's (M), JCPenney (JCP), and Kohl's (KSS).

He is aware that everything appears to be going against the group: Consumers have put the brakes on spending as unemployment continues to soar amid the deep economic recession. "Industry fundamentals still appear weak, and many of the wholesalers and retailers will likely struggle over the next several quarters," cautions Matthew Spencer, retail industry analyst at Value Line (VALU), an independent investment research outfit.

Even so, retailers' shares have surged this year, and Haverty believes it's just the beginning of a big move by the group. "This is the time to get in on these shares, which are still selling at attractive prices," says Haverty. The significant upturn in retailers' sales will start showing up in the fourth quarter, he predicts, which he says is already being reflected in the positive behavior of retailing stocks and the market.

Why Macy's Is a Favorite

Among the retailers, Macy's is Haverty's top choice. It is one of the largest U.S. mass merchandisers based on annual revenues, with 840 department stores in 45 states under the Macy's and Bloomingdale's names. Macy's "will come out ahead of the pack in the fourth quarter," says Haverty, as sales start reflecting the early signs of an economic recovery.

He believes analysts will soon raise their forecasts for Macy's to adapt to the improved outlook for sales and earnings. And the stock should continue to gain more upward momentum, he adds. Already, Wall Street analysts have begun to turn upbeat on Macy's, with six recommending a buy, 12 rating it a hold, and none advising selling the stock.

Despite the continued general gloomy mood among consumers, shares of Macy's have been displaying positive signs, bouncing from a 52-week low of 5.07 on Nov. 20, 2008, to 14 on Aug. 4. The stock hit a 52-week high of 22.96 on Sept. 9, 2008.

Macy's is still "very cheap" despite the stock's recent jump, says Haverty, who figures it is worth more than 20 based on cash flow and potential strong sales and earnings recovery. The company has "mountains of cash flow," he says, because it has not been opening new stores.