Berkshire Is Betting on This Legacy Retail Stock

After six decades of steering clear of investments in department stores, Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) is suddenly investing in a retail icon. I'm talking about Macy's (NYSE: M), the legendary retailer.

Berkshire's last department store investment was Hochschild Kohn, a Baltimore-based retail chain, back in the 1960s, but apparently it didn't go as planned, so CEO Warren Buffett became wary of traditional retailers.

Image source: Getty Images.

Berkshire first invested in Macy's in the first quarter of this year, buying about 3 million shares, a 1% stake in the retailer valued at around $55 million. It significantly increased its stake in the second quarter to 7.37 million shares. At a share price of $23.55, Berkshire's investment in Macy's is now worth about $174 million. That's about 2.8% of Macy's outstanding shares.

To be sure, that's a small investment for the massive conglomerate, which holds stakes worth tens of billions of dollars in companies like Apple, American Express, and Google parent Alphabet. And Berkshire's latest investments, mainly in Alphabet, are in tech stocks quite different from a retailer founded in 1858.

So what is the sudden appeal of Macy's stock for Berkshire?

First-quarter results were impressive

Well, Macy's had a strong first quarter, its best in four years. Revenue climbed 2% to $4.9 billion, and net income soared 66% to $63 million. Earnings per share rose 77% to $0.23. All of those beat Wall Street expectations. Management also raised its full-year outlook. It sees sales of between $21.5 billion and $21.75 billion, with earnings per share somewhere between $2 and $2.25.

Yet analysts who cover the stock don't seem to expect much upward price movement. The average price target is $22.77, nearly $1 below the current price. Of the 13 analysts who follow it, 10 have the stock as a hold, two as a buy, and one as a sell.

Yet perhaps Berkshire is impressed by the ongoing turnaround at the retailer, which also owns Bloomingdale's department stores and Blue Mercury, a luxury beauty and spa retailer. Two years ago, Macy's launched a strategy to close some 150 underperforming stores and focus on 350 others, many of which it will upgrade with a better customer experience.

The stock is also relatively inexpensive, trading at just about 10 times trailing-12-month earnings. We know that Berkshire loves a bargain or, more likely in this case, a stock it considers undervalued by the market.

American Express is an advertising partner of Motley Fool Money. Matthew Benjamin has positions in Alphabet and Berkshire Hathaway. The Motley Fool has positions in and recommends Alphabet, American Express, Apple, and Berkshire Hathaway. The Motley Fool has a disclosure policy.