Target Stock May Have Just Bottomed
An enticing dividend, solid growth and finally, the technicals to back it.
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My effort is to blend technical and fundamental analysis. Both have their merits but both can benefit when used together. With Target TGT, it’s possible that shares have not yet bottomed. However, the risk/reward has begun to skew into the bull’s favor.
The gist:
Target stock was set to decline for its 10th straight session, down 3.2% at one point on Thursday June 1st, before it reversed and closed higher.
Still, shares are down ~20% over the past two weeks and are down over 50% from the all-time high.
The recent earnings report was uninspiring.
Shares trade at roughly 15 times earnings with forecasts calling for positive earnings growth.
The stock yields about 3.3% and the dividend has been raised in 51 straight years.
The Recent Action
When Target last reported earnings (on May 17th), it delivered a top- and bottom-line earnings beat. Revenue of $25.32 billion grew a lackluster 0.4% and eked past expectations by $40 million, while earnings of $2.09 a share topped consensus expectations by a more impressive 29 cents (beat estimates by about 16%).
The quarter was fine. It was guidance that sabotaged the stock (even though shares actually rallied 2.5% in the first session after earnings before completely falling apart).
Management said it expected Q2 adjusted earnings of $1.30 to $1.70 a share (a midpoint of $1.50), short of consensus expectations for $1.92 a share.
Their full-year guide called for earnings of $7.75 to $8.85 a share (with a midpoint of $8.30 a share). While that was still short of the $8.47 a share that Wall Street was expecting, it was much closer than the Q2 guide. It suggests that next quarter will be tough, but the second half of the year should be better.
That kickstarted a nine-session losing streak, where Target stock suffered a peak-to-trough decline of 22.1%. That ended on June 1 when shares ended higher by 0.18% (after being down as much as 3.2% earlier in the session). It’s a small victory but a victory nonetheless.
Glancing at the Fundamentals
Here’s where things get interesting. Target stock now trades at just 15.5 times this year’s forecasted earnings results (which calls for $8.36 a share). Despite the disappointing outlook, that still represents almost 40% growth from 2022.
Estimates for 2024 are also impressive, which currently call for 24.4% growth. I don’t want to get too ahead of our skis, but the 2025 estimates sit at 13.3% growth. Now, estimates are just that…estimates. They were wrong a few weeks ago and could be wrong again. But if these are even close to accurate, that’s pretty solid growth.
For retailers, there’s a lot more than earnings to consider (like inventories, margins, etc). It doesn’t help that Target expects to lose about $500 million this year due to “retail shrink” — like organized theft.
However, 15-16 times earnings is a below-market multiple for what is really one of the few top retailers out there (others including Costco, Amazon, Home Depot, Walmart, etc.).
Ultimately, we need to see the decline in gross and operating margins stop (and ideally, reverse higher) before the stock can enjoy a sustainable rebound. But at some point, we have to question how much of the bad news is already priced in.
I don’t want investors to forget about the dividend, which now yields 3.3%. This is the highest yield since 2019 and the firm last raised the dividend by 20% last June. More importantly, it was the firm’s 51st consecutive increase to the annual dividend.
A Look at the Technicals
The left chart shows a daily look at the 10-day skid, while the monthly chart on the right shows the breakdown out of the wedge (which is bearish), but also shows Target finding its footing at a prior key zone from 2020, as well as the 78.6% retracement from the all-time high down to the Covid low.
The stock is down about 51% from current levels. Now that doesn’t mean we should rush out and buy it, because it can still fall another 20%, 30%, 50%, etc. That being said, today’s buyers will hit a double in the stock if it ever goes on to hit its all-time highs.
Again, that is not a reason to buy a stock. But it frames TGT in an interesting perspective.
The way I’m looking at this is, shares tested down into two key areas of interest. Patient investors are able to wait for this decline, then step in with a limited-risk setup. For instance, those who tightly control their risk could be long from current levels with a stop-loss just below Thursday’s low.
Admittedly, this could stop out some investors if we retest the low and move back to the upside. Further, we could see a rebound to “just” the $140 or $150 area, before another rollover.
In this scenario, I am looking at Target as a long-term position. That said, for a shorter-term setup, there are worse setups than risking $4 to $5 to make $10 and possibly $20 a share.
However an investor decides to approach this name (or not approach it), the point is, we’re looking at the fundamentals to decide on the business and technicals to size up a reasonable entry where we can measure our risk.
The Bottom Line (and Risks)
With Target, we have a top-level US retailer with a 3.3% yield trading at 15.5 times earnings with positive earnings growth forecasts for the next three years. It’s now trading at a 50% discount to its high.
Those who buy today without a stop-loss in place may risk significant losses from here. However, this is the largest decline Target stock has had since the 2007-09 bear market (when it fell 64%).
So to some extent, the bulk of the decline may already be in place.
The one concern? A recession. There’s no question that if the US enters a notable recession (and there are reasonable explanations as to why we could), then Target stock will struggle. But guess what? So will almost all businesses — especially retail.
Further, many retail stocks (including the retail sector (XRT)) have been trading very poorly. Maybe it’s telling us something. However, I think Target’s fundamentals and technicals combine for a unique proposition. Particularly if the $126.75 low ends up holding.