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Target Stock Is Worth a Buy on Every Dip

Tezcan Gecgil

Between Dec. 24 and Mar. 20, Target (NYSE:TGT) stock staged an impressive rally and went from a low of $60.15 to a recent high of $78.77. The Minneapolis-based retailer with 1,845 stores across the U.S. has shown strong growth in recent quarters and I expect the positivity to continue for Target stock.

Target Stock Is Worth a Buy On Every Dip

Source: Mike Mozart via Flickr (Modified)

Therefore, I suggest that long-term investors consider adding Target stock into a diversified portfolio. Here is why.

Target Has Strong Fundamentals

On Mar. 5, TGT released its fourth-quarter financial results and posted its best sales numbers since 2005. Revenues came at $22.98 billion. The Street cheered both the better-than-expected Q4 earnings report and the 2019 earnings-per-share guidance of $5.90, which beat the consensus of $5.70.

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These results follow an already strong November and December trading update that the group released in January when it reported that its holiday period comparable sales had increased by 5.7%.

One of the factors behind the impressive numbers has been the strength of the U.S. economy and the resiliency of the consumer despite the continuing U.S.-China trade war rhetoric. In addition, Target has been taking steps to win the confidence and patronage of consumers. For example, over the past year, the retailer has improved its supply chain and logistics operations, leading to cost and time savings in delivery and fulfillment practices.

About 90% of retail sales still take place in stores nationwide. And Target has been investing in its stores by remodeling them as well as opening smaller-format stores in residential areas and on college campuses to bring in the foot traffic. According to the company, “Three-quarters of the U.S. population lives within 10 miles of a Target store.” As part of its plan is to emphasize ease and convenience, Target has also introduced same-day delivery as well as curbside pickup at many locations.

Its efforts to become a respected player in today’s digital market are also paying off. After the data-breach incident of 2013, where information on over 40 million Target consumers was compromised, the retailer started investing heavily in the digital space and its e-commerce channel.  For example, it has recently announced an upcoming partnership with Pinterest to integrate Lens, the visual search offered by Pinterest, to its online store. The 31% increase in digital sales that was announced in the quarterly results is now cementing Target’s claim to have become an omni-channel retailer.

TGT currently trades at a trailing price-to-earnings ratio of 14.3 and many investors may find value in that number. If the company continues to offer robust top-line growth and improving margins, Target’s stock price could justify a higher valuation, too. For example, Walmart (NYSE:WMT) has a trailing P/E of 44.3 and Costco (NASDAQ:COST) 31.3. Therefore I am quite comfortable with the stock’s valuation despite the run-up in TGT stock’s price.

Technical Charts for TGT Stock

Over the past few weeks, both long-term and short-term technical indicators for Target stock have broken their 2018 downtrends, moving steadily higher. As such, many of the widely watched technical indicators now suggest a bullish momentum heading into the stock.

However, most retail stocks may be volatile in the coming weeks as we get updates on the state of U.S.-China trade negotiations. Also, there could be some short-term profit-taking following the strong gains in 2019.

I would not advocate bottom-picking in case of near-term price weakness. Yet, I find Target stock to be a compelling buy candidate and I’d regard any potential dip in the price as an opportunity to grab the shares for the long term. Within a year, I ‘d expect the shares to trade at $90.

Therefore, if you already own Target shares, you might want to hold your position. That said, if you are worried about short-term profit taking, then within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3-5% below the current price point, to protect your profits to date.

If you are an experienced investor in the options market, you may want to protect your portfolio with a covered call or possibly a put option spread with a three-month time horizon. If you do not yet hold TGT, you may want to wait several weeks to buy into the stock at the next dip.

The Bottom Line on Target Stock

I believe that the rest of this decade could see new highs for the TGT stock price thanks to the growth tailwind in the business and execution by management. And anyone who buys can also enjoy dividend income, which now stands at a yield of 3.2%.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

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