Part 2

Macy’s (M)

Company background

Macy’s prides itself as the go-to place for America’s leading retail experience. Macy’s, Inc. is one of the nation’s premier omni-channel fashion retailers. The company comprises three retail brands, Macy’s, Bloomingdale’s and Bluemercury. Macy’s, Inc. is headquartered in New York, New York. With a national stores footprint, robust e-commerce business and rich mobile experience, our customers can shop the way they live – anytime and through any channel. It currently has over 90,000 employees and 764 stores around the US.

All three of the company’s brands and sub-divisions have embedded themselves into the everyday lives of millions of Americans, which gives Macy’s solid and relatively stable long-term growth prospects.

Macy’s – is America’s Department Store, an iconic brand and retail industry leader. Macy’s customers come to its stores, e-commerce site and mobile app for fashion, value and high-quality products. Macy’s is proud of its heritage and the unique role it plays in American culture and tradition.

Bloomingdale’s – is “a store like no other,” known nationwide as a contemporary and of-the-moment brand focused on offering exceptional service and experience to customers both in-store and online.

Bluemercury – is the friendly neighborhood beauty store where clients can get honest, expert beauty advice. The brand is widely recognized as the nation’s largest and fastest-growing luxury beauty products and spa retail chain.

Current position – Financial performance and Future Growth prospects

Macy’s stock has experienced a relatively positive momentum throughout the last few months as investors have seen the solid growth in the company’s digital platform and its overall efforts on further improving consumers’ shopping experience as potential signals of a powerful turnaround story for the company. Macy’s has also focused on introducing new ways for its clients to shop such as curbside and store pickups, which have also been widely welcomed by customers. What’s even more impressive is that despite the devastating effect that COVID-19 has had on the company’s business with store sales plunging 36% year on year, and the top line declining 22.7%, it seems that the senior management of the company has managed to fight back the virus rather efficiently as during the third quarter the company saw growth across all its three brands namely, Macy’s, Bloomingdale’s and Bluemercury. Furthermore, some of the leading growth-categories for the company were jewelry, home furnishing and fragrances.

Women’s Accessories, Intimate Apparel, Shoes, Cosmetics and Fragrances accounted for 39.5%, Women’s Apparel accounted for 18.3%, Men’s and Kids’ accounted for 19.8% and Home/Other contributed 22.4% to the first half of fiscal 2020 net sales.

What we really like about Macy’s is that while the COVID-19 pandemic has hit the business hard it has also forced the company to accept the fact that its business was not optimized and structured well for the modern day economy as it was mostly depending on its in-store sales while Macy’s online positioning was relatively poor. However, the company is currently in the process of completely transforming its business and has outlined all of its plans under its three-year Polaris Strategy aiming to adapt better to the new retail ecosystem. Furthermore, the company has identified things like Backstage locations, Vendor Direct, Store Pickup, Loyalty Program, Growth150 stores, ‘mobile first’ strategy and Destination Businesses as the main focus areas of its new business renovation strategy.

Throughout 2020 Macy’s managed to raise nearly $4.5 billion of new financing, which includes senior secured notes as well as asset-based credit agreement worth $1.3 billion and $3.15 billion, respectively. This provided investors with a piece of mind heading into 2021, as the company will have enough liquidity to meet business needs, comprising funding operations and purchase new inventory for upcoming merchandising seasons, resolving its accrued payables obligations, and repaying upcoming debt maturities in fiscal 2020 and fiscal 2021. At the end of third-quarter fiscal 2020, the company had about $3 billion of untapped capacity in the new asset-based credit facility. Macy’s ended the third quarter with cash and cash equivalents of $1.55 billion, reflecting a sequential rise of 11.2%.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 3 months taking the price from the October 28th lows of around $5 to the 52-week highs at over $20 per share registered at the end of February. Throughout this remarkable more than 300% rise of the stock we have observed a relatively consistent weakening of the bullish momentum, clearly portrayed by the sideways movement and lower highs put in by the RSI, thus creating a strong daily divergence between the price and RSI charts. This could easily be taken as an important warning sign for the bulls, showing them that a potential downturn or reversal could be just around the corner. The stock has already dropped almost 30% from the $21.55 highs printed at the end of last month. What’s more important though is that the technical picture shows that this might be just the beginning of the decline for Macy’s stock. We are currently seeing a double-top bearish reversal pattern forming on the Daily chart right at the $18 mark, which in turn has acted as a multi-year horizontal resistance for the stock. The combination of the excessive 3-month rally, the technical patterns and the time that the company will need to actually complete its business renovation strategy point to the fact that the most likely direction for the stock in the coming weeks is lower.

We will start buying M around the $13 mark and will add to our position only after the price drops towards the $10 mark, just above the major support there where lots of buying pressure is expected. In case the price breaks the support and drops further, we will be interested in adding more to our buy positions at the next strong support at $6.50-7.50. Our first take profit target is at $15, followed by the next target at $18.50 where we will be fully closing our positions and collecting the profits.

The stock is currently trading at around $15 per share with a clear loss of the previous strong upward momentum. The most important price level for the stock at the moment lies at $13.60, where we can see 2 very strong support lines overlapping with one another. The horizontal and diagonal upward sloping support lines at $13.60 could bring some short-term bullish interest for the stock among speculators and retail traders, but we believe that the stock ultimately breaks lower. The next strong support zone on the daily chart is around the $10 mark where we can also see the 100 DMA.

However, we are firm believers in the long-term turnaround story that Macy’s will be able to stage, thus our long term investment plan for this stock will be to apply the accumulation approach and buy more from the stock on any dip. The current price around $15/share is way too expensive with respect to the company’s business position at the moment, thus we would prefer to wait for a more meaningful pullback before we initiate our Long positions. A good place to start accumulating shares in Macy’s would be around the $10 mark. In case, the stock moves lower throughout Q1 and Q2 then you should look to add more to your position anywhere between $6.50-7.50/share, thus improving your average cost basis of the trade.

Chipotle Mexican Grill (CMG)

Company background

Chipotle, is an American chain of fast casual restaurants in the United States, United Kingdom, Canada, Germany and France, specializing in tacos and Mission burritos that are made to order in front of the customer. Its name derives from chipotle, the Nahuatl name for a smoked and dried jalapeño chili pepper.

Chipotle is one of the first chains of fast casual dining establishments. Some of its major competitors in the fast-casual Mexican market are Qdoba Mexican Grill, Moe’s Southwest Grill, Rubio’s Coastal Grill, and Baja Fresh. The company was founded by Steve Ells on July 13, 1993, and it originally had 16 restaurants (all in Colorado). However, McDonald’s Corporation saw a lot of growth potential in the brand and became a major investor in 1998. MCD’s help, leadership and funding helped Chipotle to turn from a local fast-food business to a nationwide phenomenon, as by the time McDonald’s fully divested itself from Chipotle in 2006, the chain had grown to over 500 locations. In the 10 years that followed after McDonald’s Corporation left as a majority investor the Chipotle’s growth rate continued to increase and by 2015 the company had more than 2,000 locations, a net income of US$475.6 million and a staff of more than 45,000 employees by the end of 2015. In May 2018, Chipotle announced the relocation of their corporate headquarters to Newport Beach, California, in Southern California, ending their relationship with Denver after 25 years. In 2020 the company had reached almost 3,000 restaurants globally.

What makes Chipotle unique as a fast-food restaurant brand is that Chipotle was born of the radical belief that there is a connection between how food is raised and prepared, and how it tastes. The company preaches the idea that “Real is better. Better for You, Better for People, Better for Our Planet It may be the hard way to do things, but it’s the right way”. This socially responsible approach has definitely served the company well as it has allowed Chipotle to build a very socially liked and accepted business model, which in turn has turned Chipotle into one of the most beloved restaurant brands in the US.

Current position – Financial performance and Future Growth prospects

Chipotle’s stock has seen a very strong bullish momentum and overall positive sentiment throughout the last 10 months as the stock has staged an absolutely phenomenal recovery from the COVID-19 related lows set back in March, 2020. The stock bottomed at around $413 per share in March 2020 and ever since then it has been on an absolute tear to the upside reaching its all-time highs of $1565 in the beginning of February. This represents an outstanding 279% share price appreciation in less than a year. The company outperformed the Retail – Restaurants industry last year and has also managed to do that so far this year. We must point out that the stock performance as well as the overall company performance throughout 2020 deserves special attention and admiration as the Retail – Restaurants industry was one of the hardest hit sectors of the economy and the management of Chipotle Mexican Grill has managed to navigate these strange, crazy and very uncertain times in a great way. We have seen a significant increase in the importance of online sales, presence and the overall digitalization of the company throughout the COVID-19 pandemic. This has allowed Chipotle in sustaining growth as a restaurant operator. Furthermore, the company has undertaken multiple initiatives focused on redesigning its online ordering site, online payment for catering, meal customizations as well as implementing collaboration with third-party providers for faster and more efficient deliveries. Also, the company stated that it has enough liquidity to tide over the ongoing crisis.

A detailed analysis of a company’s balance sheet has always been a key financial evaluation approach for determining any company’s overall well-being. This has become even more important throughout the coronavirus crisis as the thing that investors are most worried about before investing in a certain stock during this environment is whether or not the underlying business has the capacity and the finances to cover its fixed and operating expenses, debt obligations and to continue to grow during this crisis. Chipotle has a strong balance sheet, which has helped the company to navigate the current scenario efficiently and productively. As of Sep 30, 2020, the company had $1.1 billion in cash, restricted cash, and short-term investments compared with $934.6 million as of Jun 30, 2020. At the end of the third quarter, long-term operating lease liabilities stood at $2.8 billion, almost flat sequentially.

The thing that makes Chipotle Mexican Grill to truly stand out is the fact that at the end of third-quarter 2020, the company stated that it has no debt, thereby maintaining strong financial position. In a world filled with overleveraged and heavily indebted companies, where debt on personal, corporate and government level has reached its highest levels in history, Chipotle is a true champion from a financial standpoint. This has definitely been a major reason for the remarkable interest towards the stock from both institutional and retail investors.

Chipotle Mexican Grill delivered a very solid and better-than-expected financial performance in its Q3 2020 earnings report released on February 2nd, 2020:

– Adjusted earnings of $3.76 per share beat the expectation of $3.43. However, the bottom line declined 1.6% from $3.82 reported in the year-ago quarter.

– Revenues of $1,601.4 million not only surpassed the consensus mark of $1,586 million but also grew 14.1% year over year. The upside can be primarily attributed to robust digital sales along with new restaurant openings. In the quarter under review, Chipotle opened 44 new restaurants and closed three, taking the total restaurant count to 2,710.

– Digital sales grew 202.5% year over year to $776.4 million during third-quarter 2020. Digital sales represented 48.8% of sales during the quarter. Notably, collaboration with all major third-party delivery aggregators has increased orders for the company. Also, the addition of Chipotlanes benefitted the company, enhancing guest access and convenience.

– Comparable same store sales increased 8.3%, following a decline of 9.8% in the second quarter of 2020.

At any rate, some analysts argue that the pandemic is likely to have a long-term negative impact on traffic and sales in the coming quarters. Another argument against the company that we tend to see, is that the rise in food and labor costs is likely to keep profits under pressure. However, we believe that all of these issues are nothing else but short-term speed bumps for this financially stable, growth oriented and beloved fast-food restaurant brand.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 10 months taking the price from the March 18th lows of around $413 to the all-time of $1565 per share in the beginning of February. After initially peaking at around $1390 per share in the beginning of September, the stock ended up moving in the $1185 – $1400 sideways channel all the way up to Christmas, when we saw the stock breaking above the strong all-time high horizontal resistance at $1400. What needs to be pointed out is that while the initial break occurred with a relatively strong bullish momentum and on a large volume, both the volume and the underlying bullish momentum have been fading since the beginning of the new year. This has been clearly portrayed by the lower highs put in by the daily RSI and by the fact that the indicator has failed to break above the 70 mark, thus creating a strong daily divergence between the price and RSI charts. This could easily be taken as an important warning sign for the bulls, showing them that a potential downturn or reversal could be just around the corner. The stock has managed to set new all-time highs recently but as it seems from a purely technical standpoint CMG might not have enough power to continue to push higher from here in the short term.
With that being said, the recent strong and better-than-expected Q3 2020 earnings report released earlier in February could act as the fundamental catalyst that the company needs to break higher.

We will start buying CMG at $1375, just above the major support there where lots of buying pressure is expected. In case the price breaks the support and drops further, we will be interested in adding more to our buy positions at the next strong support at $1250-1275. Our first take profit target is at $1730, followed by the next target at $1815 where we will be fully closing our positions and collecting the profits.

However, we need to keep in mind that stocks trading near their all-time highs on a relatively lower volume with a fading bullish momentum could be very dangerous short-term plays for the bulls. We are currently seeing a potential bearish divergence reversal pattern forming on the Daily chart right at the $1565 mark, which in turn has acted as a multi-year horizontal resistance for the stock. The combination of the excessive almost 300% 10-month rally, the technical patterns and the general uncertainty in the market might be signaling that the stock needs somewhat of a sideways consolidation pattern with a slightly downward bias, before it resumes its strong long-term bull trend.

The stock is currently trading at around $1527 per share with a clear loss of the previous strong upward momentum. The most important price level for the stock at the moment lies at $1375, where we can see 3 very strong support lines overlapping with one another around that level. The horizontal support line at $1375, which is the former all-time high for the stock currently overlaps with both the 50 DMA and 100 DMA, which currently lie at $1410 and $1355 respectively. The next strong support zone on the daily chart is around the $1185 mark where we can see another strong horizontal support, which is expected to provide a lot of buying interest.

However, we are firm believers in the long-term growth prospects for Chipotle Mexican Grill, thus our long term investment plan for this stock will be to apply the accumulation approach and buy more from the stock on any dip towards the above-mentioned support zones. The current price around $1527/share is not recommended as a good entry point for any Long positions, simply because it is never a good idea to chase stocks higher. Even the best stock could prove to be an under performer if you end up paying too much for it! With respect to the company’s business position at the moment and the situation with the Retail – Restaurant industry in general, we would prefer to wait for a more meaningful pullback before we initiate our Long positions. A good place to start accumulating shares in CMG would be around the $1375 mark. In case, the stock moves lower throughout Q1 then you should look to add more to your position anywhere between $1200-1275/share, thus improving your average cost basis of the trade. Our targets to the upside will be placed at $1730 and $1815 per share respectively.

Sincerely,

This image has an empty alt attribute; its file name is logo.svg

Add a comment