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Beware this bargain buy

Beware this bargain buy

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Investors fled Target’s stock Tuesday after the retailer cut its second-quarter profit outlook, citing costs related to its December 2013 security breach, as well as discounts and promotions to attract shoppers.

The revision sent Target shares down around 4 ½ percent, making it one of the worst performers in the S&P 500 on the day. The stock is now down more than 8 percent on the year, so could it be a bargain buy or value trap?

(Read: Target warns on profit as sales stay "essentially flat")

“We like this stock, we have it in several of our model portfolios,” said S&P Capital IQ’s Erin Gibbs.
Gibbs noted that Target could see further downside following earnings on August 20, and, in her opinion, has to overcome three manageable “challenges.”

  1. Overcoming the impact of security breach is slow process of building back confidence, costs related to the breach, and the sales slowdown may persist for the next couple quarters.
  2. Canada stores have been disappointing but could be an area of above average growth over the next few years.
  3. Value conscious shoppers are compressing margins by waiting for promotional markdowns. Target has to lure shoppers back to big box stores.

“We see [Target] as having long-term growth. We’re looking at about, even with reduced guidance, we’re looking at about 15 percent earnings growth over the next 12 months, which is above the S&P 500,” Gibbs said.  

Challenges aside, the charts don’t look appealing from a technical perspective. “Even with today’s loss, we still see [Target] as a sell,” said Oppenheimer’s chief market technician Ari Wald. “We see much better places to put your money right now.”

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Target's chart shows a measured downside to $55.

Target's chart shows a measured downside to $55.

His reason is simple, trade in the direction of the stocks 200-day moving average. “For Target, that 200-day is down and that indicates that Target has a very weak long-term trend,” Wald said. “This downward inflection we think could just be getting going.”

Wald projected measured downside to key support at $55 per share, 5 percent lower than current levels.

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