The S&P 500 is off to a rocky start this New Year (posting a 2.64% drop), but shares of Target Corporation (TGT) have taken a decidedly different course with Target stock higher by 2.02% to start the year.
Click to Enlarge I expect this relative out-performance to continue, especially given the technical backdrop displayed recently by TGT stock. After making a new recent low at $68.15 on November 18, shares of TGT reversed course and headed higher, with a series of higher lows. The bounce off the $70 support level also coincided with the gap on the chart from 11/19/14.
Click to Enlarge TGT stock also had a bullish engulfing day on January 4, with TGT stock trading down to the lower end of the channel before pivoting to close near the highs of the day. Both the high and the low of that day exceeded the previous day’s high and low, which signals that the bulls are still firmly in charge.
Click to EnlargeLast October, TGT launched an international version of its website, which will definitely help expand the global footprint. Target is also developing their own mobile wallet to compete with the likes of Walmart (WMT) and Apple (AAPL).
On a fundamental basis, Target stock looks attractive compared to the overall market. TGT stock sports a hefty 3.02% yield, compared to the 2.11% yield for the S&P 500. TGT also has a long history of increasing the dividend, with a current payout ratio of only 44.07%. The forward P/E is 14.33, well below the S&P 500 forward P/E of 17.20.
Lower gasoline prices will likely be a benefit to Target stock as well. A recent study by J.P. Morgan Chase shows that individuals will spend about 80% of the savings from cheaper gasoline prices, with the lower to middle income consumers feeling the biggest benefit.
Given the bullish technical and fundamental backdrop, I look for TGT to hold support at $70 for the next few months. With implied volatility still at fairly elevated levels, I favor option selling strategies with defined risk , so selling a bull put spread fits this scenario.
Specifically, I would sell the TGT Feb $70 puts and buy the TGT Feb $67.50 put for a 46 cents net credit. The short $70 strike provides a 5.83% downside cushion and is positioned right at the $70 support level.
The maximum gain on the trade is $46 per spread, with a maximum loss of $204 per spread. The return on risk is 22.55%. If TGT stock significantly breaks the $70 support level, then cover the trade. If Target stock remain well-behaved, let the spread expire worthless and keep the initial $46 net credit.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
