Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Activist investors keep dropping in at Macy's.

The stock added roughly 2 percent on Tuesday after David Einhorn's Greenlight Capital revealed it had amassed a small stake in the department-store chain.

Deep Discount
As Macy's valuation has declined, shareholder activists have been quick to demand change.
Source: Bloomberg

Greenlight joins Starboard Value in joining Macy's register, a move that underscores two facts that we pointed out last week: activists are crowding the market and, in some instances, they're resorting to basic stock-picking.

Einhorn's firm says the retailer’s shares as a measure of earnings and free cash flow are cheap, even if a private-equity firm doesn’t team up with a real estate investment trust, or REIT, to buy Macy's (a move that wouldn't surprise the activist and would make Starboard Value happy, too). The company has so far shunned the idea of establishing a REIT in favor of selling stakes in its flagship stores and mall-based properties. 

Macy's may well be cheap enough to draw suitors. As well as carrying relatively little debt, its valuation as a measure of earnings before interest, taxes, depreciation and amortization is just above 5 times, which is less than Kohl's, another potential target. But it's been battered for a reason: Analysts and investors have been wary about the company’s ability to shrink its physical presence while attempting to better compete with online rivals.

The funny thing about Greenlight's investment is that it relies in part on variables -- weather, currency fluctuations -- that Macy's can't even control. That’s because Greenlight believes that Macy’s recent sales weakness, driven by a warmer U.S. winter and the strong dollar deterring spending by tourists, should set up "for favorable comparisons."

Despite the bump in Macy's stock price following Greenlight’s disclosure, the firm is still in the red. According to a letter to investors obtained by Bloomberg News, it bought the department-store chain's shares at an average of $45.69, meaning the stock has to climb more than 15 percent for the fund to break even. That's more than the $42.75 that 20 analysts surveyed by Bloomberg expect the stock to reach in the next 12-months. It's also well north of 0.9 percent, the meager median return achieved last year by activists in the 60 days following a campaign announcement, according to data from Citi's Financial Strategy and Solutions Group.

Shrinking Payoff
The median outperformance of stocks targeted by activists is at a five-year low.
Source: Citi and FactSet

Greenlight may have had its second-worst year, losing 20 percent in 2015 from betting against top performers like Amazon and Netflix as well as four takeover targets (including Keurig Green Mountain). Regardless, it says some investors have inquired about adding capital, and that there has only been a "modest" withdrawal of funds, or redemptions . The firm wrapped up the letter with a quote from the late David Bowie, "I don’t know where I’m going from here but I promise it won’t be boring."

Einhorn is now firmly on the Macy's bandwagon. It remains to be seen how exciting a ride that will be for his investors.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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