For the stock market, 2021 has been an inversion of 2020 in so many ways. Many of the biggest winners of last year have turned into some of the biggest underperformers this year. Just take a look at the work from home stocks, cannabis stocks, or the electric vehicle (EV) sector. Certainly, we can point to many factors such as the economy reopening, long-term interest rates moving higher, the rotation from growth to value, and the market’s general tendency to mean-revert especially when trends get extended.

Thus, it’s also not surprising that the laggards of last year are now outperforming this year. Some noteworthy examples include the energy sector as oil is now above the pre-coronavirus levels, travel and tourism stocks such as the airlines, hotels, and cruise operators, and retail stocks. 

Within that group, retail stocks are particularly interesting. Among the retail sector, one of the strongest performers in 2021 has been Macy’s (M) with a 67% YTD gain. Despite this impressive gain, I believe the stock has more upside for the following four reasons: the economy’s reopening which is leading to increased foot traffic to stores and more spending on formal attire; the company’s booming e-commerce sales; strong consumer spending figures; and very attractive valuations.

Economy Reopening  

Even before the coronavirus, many retailers were struggling as traffic to retail locations was declining. This was despite overall consumer spending remaining strong, however, e-commerce was taking an increasing share of people’s spending power. Of course, the coronavirus made the situation worse as many stores were closed, and foot traffic was even more depressed. 

However, this situation is certainly changing now as foot traffic to stores is increasing as case counts drop with an increasing share of the population getting vaccinated. Already, we can see parking lots that are full of cars. According to REIT retailers like Tangiers Outlet Centers (SKT) and Macerich (MAC), total spending is already at 2019 levels in places that still have restrictions and 10% above 2019 levels in places without any restrictions. 

Another catalyst for Macy’s is the expected boom in sales of formal attire and footwear. Understandably, sales of these categories totally collapsed during the pandemic as people weren’t going to the office or social events. Now, there is going to be a massive pent-up demand for people looking to buy these items as the economy returns to normal which is a very, positive tailwind for the company.

Already, it’s evident in the company’s results as sales topped the higher end of the expected range by 10% in its latest quarter. 

Booming E-Commerce Sales

Macy’s has been a major underperformer for many years especially as the company failed to build out its digital sales channel unlike other retailers like Nordstrom’s (JWN) or Target (TGT). However, the pandemic gave the company no choice, and it has made significant strides. 

In the last quarter, 53% of Macy’s sales were online, and it was a 34% increase from the year prior. Further, the company was able to use its stores as distribution centers for deliveries and pickups. It’s now the 10th leading e-commerce retailer in the US. 

And, its e-commerce momentum is continuing as the company expects it will exceed $10 billion in sales by 2023. Over the last year, it estimates adding 7 million online customers.

Now, both of Macy’s sales channels will show strong growth over the next few quarters. 

Strong Consumer Spending

Macy’s is also going to benefit from the strength in consumer spending. Due to the improving economy, tight labor market, and stimulus payments, consumer spending is at record highs. 

Going forward, there’s little reason to expect this circumstance to change especially as the household savings rate remains above-average. Further, the gradual normalization of the economy should be a potent tailwind to growth. Additionally, household balance sheets remain in good shape in terms of low default rates and percent of income going towards debt payments. 

All of these measures indicate that consumer spending’s trajectory remains higher over the next couple of years.

Attractive Valuation

Despite Macy’s strong earnings report and positive tailwinds, the stock price remains very attractively priced. This is evident from its forward price to earnings ratio of 9.2. 

Basically, this only makes sense if investors believe that the improvement in Macy’s results is temporary. Based on the factors mentioned above, this clearly is not the case. Thus, Macy’s should be bought despite its impressive gains as the stock should benefit from earnings growth and multiple expansion. Given these factors, it’s not surprising that Macy’s has a B grade for Value according to the POWR Ratings.

Conclusion

Sometimes, stocks go up and outpace their fundamentals. Macy’s is an exception as its fundamentals have outpaced its stock price. Therefore, investors should continue to look to accumulate on weakness.

This is also reflected in Macy’s POWR Ratings as it has an overall rating of a B which translates to a Buy. B-rated stocks have an average annual performance above 19% which compares favorably to the S&P 500’s annual 7% return. To learn more about Macy’s POWR Ratings, click here.

M shares. Year-to-date, M has gained 63.91%, versus a 13.91% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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