By instinct, most investors will arguably turn their backs on struggling department store Macy’s (M). Though an iconic retail institution, the company is failing to resonate with consumers in an increasingly digitalized ecosystem. In the past five years, M stock has gone nowhere, losing about 19% of equity value. It has basically returned to price points seen right before the COVID-19 crisis…big whoop.
It’s not so much about the company as it is the concept of department stores. While the shopping mall may not be on life support per say, the stats aren’t particularly encouraging. As Barchart contributor Ilir Salihi remarked, “Malls had an 8.7% vacancy rate at year-end 2022, and an average of 1,170 shopping malls closed each year between 2017 and 2022.”
There might be the occasional uptick in demand for brick-and-mortar retailers. However, the broader trend tends to be negative. As such, Macy’s earlier entered into negotiations about selling the business. However, last month, those talks broke down, with the retailer stating that a proposed buyout deal with an investor group did not bring compelling value to the table.
Due to the cessation of negotiations, M stock fell nearly 17% in the trailing month. Since the beginning of the year, the equity now finds itself behind the eight-ball by more than 20%. Yes, Macy’s is betting on itself. However, the market seems to agree that this is not a wager worth taking.
Thanks to the mess, Barchart noted that Macy’s stock has now become a Death Cross candidate. This screener – one of many that Barchart offers its readers – warns ahead of time which equities risk printing the death cross: a chart pattern where a longer-term moving average slips beneath a shorter-term average.
In fact, the investment resource gave the signal on Wednesday. Ordinarily, that might be a signal to run. However, in this case, it could be a surprise buying idea.
Options Traders Are Quietly Bidding Up M Stock
While instincts and the fundamentals may be telling investors to run away from Macy’s stock, options traders – the true smart money – appear to be bidding up its derivative contracts, suggesting that a shocking turnaround could be in place. Granted, it’s a wildly contrarian concept but the data is compelling.
On Thursday, M stock represented a “lowlight” in Barchart’s screener for unusual stock options volume. Total volume reached 13,194 contracts against an open interest reading of 305,140 contracts. This stat represented a 33.33% decline from the trailing-month average volume. But drilling into the details, traders acquired 8,286 calls compared to 4,908 puts.
Moving over to the options flow screener – which focuses exclusively on big block transactions likely placed by institutional or professional traders – net trade sentiment stood at $88,000 in favor of the bulls. Sentiment during the midweek session also favored the bulls by a similar dollar amount.
What’s more, on Thursday, the total of all premiums associated with bullish sentiment options stood at $170,500. For bearish premiums, the total was $-82,500. Stated differently, there were more than twice as much dollar volume bets favoring the optimists than the pessimists. That’s a surprising outcome considering the negative attention that Macy’s stock received from business media headlines.
Therefore, it’s quite possible that because the death cross has a directly negative implication, the professional traders may be gambling against the tide of conventional wisdom. It’s a risky bet but if it pans out, the rewards could be intense – precisely because so few are expecting it.
Interestingly, the calls generally range from a strike price of $16 to $20. The highest price target stands at $22. For reference, Wall Street analysts are targeting an average price target of $18.44 with an optimistic view of $27. Thus, the strike prices are very reasonable.
Furthermore, a clear support line exists at $19, which is one of the benchmarks the bulls will likely aim for. Ultimately, a long-term push toward the psychologically important $25 level could be in the cards if the optimists manage to gain momentum.
Fundamentals Could Bode Well for Macy’s
Another reason to keep close tabs on M stock is the upcoming fiscal second-quarter earnings report scheduled for next week. In the year-ago quarter, the retailer delivered earnings per share of 26 cents on revenue of $5.13 billion. Both figures beat their respective consensus targets, although the sales tally represented a year-over-year decline.
It’s possible that Macy’s may enjoy a strong outing again. In Q2 2022, the company posted EPS of 85 cents on revenue of $5.54 billion, also beating top-and-bottom-line estimates. Fundamentally, retail sales were unchanged in June from May, according to an AP report. While it’s just a snapshot, the datapoint suggests that consumers are more resilient than expected.
If so, it would make sense that despite the public betting against M stock (as signified by the death cross), the smart money has been quietly putting money to work in the options market. While it may be instinctual to shy away from Macy’s, the actual data weaves a rather compelling tale.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
