Make a Call on Target’s Holiday Strategy With Options (TGT)

No matter what happens with consumer confidence, TGT is still a great deal

   

Make a Call on Target’s Holiday Strategy With Options (TGT)

Big department store retailer’ stocks have been struggling recently. Companies like Target (TGT), Wal-Mart  (WMT) and Macy’s (M) stocks have all seen big pullbacks in the last month, as U.S. consumers are reluctant to spend as much of their money in department stores. However, Target might overcome this situation and find customers willing to spend, due to its expansion outside the U.S.

After several months of improved consumer confidence, the situation is showing signs that there is some deterioration occurring. Mortgage rates are hovering around their two-year highs, and payrolls are growing at their slowest rate in a year. Earlier this month, the Thomson Reuters/University of Michigan consumer sentiment index fell to its lowest level since April. The picture will become clearer on September 24 after the Conference Board presents its September figures on consumer confidence.

Lynn Franco, Director of Economic Indicators had this to say about the August figures:

“Consumer Confidence increased slightly in August, a result of improving short-term expectations. Consumers were moderately more upbeat about business, job and earning prospects. In fact, income expectations, which had declined sharply earlier this year with the payroll tax hike, have rebounded to their highest level in two and a half years. Consumers’ assessment of current business and labor market conditions, on the other hand, was somewhat less favorable than last month.”

The question now is…will September match up or improve? Or will others influences come into play, such as the Thomson Reuters/University of Michigan consumer sentiment index?

For retailers such as Target, it will be a very important report considering how close we are to the upcoming holiday shopping season. Target has been a decent performer in 2013, having traded up 12.6% year to date, but that still has underperformed the broader market. This indicates that there is plenty of room for Target to move upwards.

092313 TGT CHART 1 Make a Call on Targets Holiday Strategy With Options (TGT)

Also, there are several factors that indicate that Target should trend upwards, even if the consumer confidence figures are less than they should be. The stock has seen a pullback due to the last earnings report for a nice buy-in price; management outlook is stable; there’s plenty of analyst support; expansion will prove a positive move forward and a boost from holiday trading is ahead.

A Disappointing Earnings Report Leaves Room to Move

Last month, Target reported disappointing second quarter results, as well as issuing an adjustment to its full year EPS guidance to the low range of its previous forecast. This resulted in a sharp selloff of the stock, but shares have now started to rebound over the past few days. A positive report on consumer confidence could help the stock continue to make back some of its recent losses, but if the result is unfavorable then there is sufficient time built in for this options trade to play out successfully.

The main reason that Target missed its projected targets was due to the expansion into Canada. Had the Canadian operations not reduced Target’s earnings, the company would have earned $1.19 per share, and beat Wall Street expectations. As costs for the expansion are reduced this operation will also become more profitable.

Smarter Anticipations by Target Management

Target plans to hire about 70,000 seasonal workers for the holiday shopping season, which is about 20% less than a year ago. The discounter is aiming to be more efficient in its hiring practices.

The move to hire 18,000 fewer temporary holiday workers versus last year’s 88,000 comes as the Target management saw that its own permanent employees wanted to get first dibs on working extra hours for the holiday season.

Target said it also wants to respond more quickly to the peaks and valleys of customer traffic, which have become more pronounced for many stores as shoppers time their buying for when they believe they can get the best deals.

Jodee Kozlak, Target’s executive vice president of human resources sums up:

“We’re getting smarter in terms of anticipating how many resources we need when guests are really going to be shopping the hardest.”

Technicals Point To An Uptrend

Target Corp. has a one year low of $58.01 and a one year high of $73.50. Technical indicators for TGT are turning bullish as the stock is showing signs of a possible trend reversal. The stock has support above $63.25.

The stock has a 50-day moving average of $68.16 and a 200-day moving average of $66.65. The company has a market cap of $40.632 billion and a price-to-earnings ratio of 15.52.

092313 TGT CHART 2 Make a Call on Targets Holiday Strategy With Options (TGT)

Expansion Will Be A Plus

Target opened 68 new stores in Canada in the first half of the year, as well as 10 new stores in the United States. A majority of these stores will feature a licensed Starbucks Corporation (SBUX) and in-store pharmacies. The expansion has brought expenses associated with the stores, which has affected margins. Some investors have been concerned that the Canadian expansion might not go as well as planned, which probably contributed to the recent decline in the stock price.

Analysts Favor Target

Several analysts have recently commented on the stock. Analysts at Zacks upgraded shares of Target from an “underperform” rating to a “neutral” rating and now have a $68.00 price target on the stock. Separately, analysts at Goldman Sachs Group Inc. initiated coverage on shares of Target and set a “neutral” rating on the stock. Finally, analysts at Citigroup Inc. reiterated a “buy” rating on shares of Target and now have a $72.00 price target on the stock.

Two research analysts have rated the stock with a sell rating, fourteen have issued a hold rating, ten have issued a buy rating and one has issued a strong buy rating to the stock. Target presently has a consensus rating of “Hold” and an average price target of $71.90.

092313 TGT ANALYSTS Make a Call on Targets Holiday Strategy With Options (TGT)

Recommendation

Jobs are becoming easier to get and the housing recovery is gaining momentum, however, the improvements have not been strong enough to sustain higher levels of spending for most shoppers. In fact, many stores such as Target lowered their expectations for the rest of the year, citing a tougher-than-expected spending environment, which has resulted in a pullback of stock price and allowed a better entry price for this options call.

Credit Suisse sums up the consumer confidence situation nicely:

“Cross currents should leave consumer confidence little changed in September. On the plus side, Augusts’ unemployment rate (reported in September) ticked down, stocks have moved higher, and it does not look like the U.S. is gearing up for military operations in Syria. However, households appear worried about the back up in mortgage rates. Hence, the outlook for housing and business conditions has become less favorable. Other confidence surveys have been mixed in September.”

Therefore, despite whatever happens with the consumer confidence survey, Target is still a great bargain and should present a move forward.

Therefore, take advantage of the following options call:

OPTIONS TRADE: Buy the TGT Jan 2014 65.000 call (TGT140118C00065000) at or under $2.20, good for the day. Place a protective stop limit at $0.90 and a pre-determined sell at $3.30.

Visit stock-options-made-easy.com for a wealth of information that will help you benefit from the exciting and lucrative world of options trading.


Article printed from InvestorPlace Media, http://investorplace.com/2013/09/make-a-call-on-targets-holiday-strategy-with-options-tgt/.

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