Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value? One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process.
Let’s put Target Corporation (NYSE:TGT) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
Target’s PE Ratio is Favorable
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world.
The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Target has a trailing twelve months PE ratio of 11.74, as you can see in the chart below:
This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 20.39. If we focus on the long-term PE trend, Target’s current PE level puts it below its midpoint of 14.46 over the past five years. In fact, the current level stands closer to the lows for the stock, highlighting that it could be a superb entry point.
Further, Target stock’s PE also compares favorably with the Zacks classified Retail – Wholesale sector’s trailing twelve months PE ratio, which stands at 27.29. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should point out that Target has a forward PE ratio (price relative to this year’s earnings) of 13.80, so it is fair to expect an increase in the company’s share price in the near future.
Target’s P/S Ratio is Well Below the S&P Average
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, Target has a P/S ratio of about 0.46. This is significantly lower than the S&P 500 average, which comes in at 3.15 right now. Also, as we can see in the chart below, this is well below the highs for this stock in particular over the past few years.
If anything, TGT is in the lower end of its range in the time period from a P/S metric, suggesting some level of undervalued trading—at least compared to historical norms.