A Discount Retailer That’s Actually Cheap

by Richard Band | March 18, 2011 4:00 am

The market seems to have experienced a bit of the luck o’ the Irish Thursday, when it reversed after three days of big losses. The Dow rose 161 points, helped by news of a strong reading in the March Philadelphia Fed factory activity index and an encouraging drop in first-time jobless claims (down 16,000 to 485,000 in the week ended March 12). This rebound was supremely important from a technical standpoint, because it suggests that the longer-term primary bull market is still in force — despite this recent interim “correction.”

We’re not just playing with words here, though. We’re talking about risk. Yes, there’s a good chance the pullback could resume within a few days, and could take the blue-chip indexes (Dow and S&P 500) as much as 10% below their February highs. We probably haven’t heard the last of the unhappy news from Japan.

However, a blowout on the downside (say, a 20% decline) is unlikely. One reason I can say so is that stock prices rallied Thursday without reaching the oversold extremes that typically signal the kickoff phase of a new bear market.

If our risk here is limited, what should we be doing? The obvious answer: Buy. But it’s too late in the game to be buying indiscriminately. Too many stocks are overvalued, even after the recent skid.

I recommend sticking with names that are certifiably cheap, like Target Corp. (NYSE: TGT[1]). At less than 12 times forward earnings, the discount retailer is itself trading at a discount — of about 14% to the S&P 500. Back in the summer of 2005, TGT sold for a 45% premium to the S&P. Quite a swing! Buy TGT at $56 or less. From Thursday’s close at $50.38, I’m projecting a total return of at least 25% in the coming year.

Assuming we get another dip in the days ahead, I would also put in some buy orders for my favorite mutual funds: FMI Large Cap (MF: FMIHX[2]), Fidelity Contrafund (MF: FCNTX[3]) and Gabelli Equity Income (MF: GABEX[4]). All have done a better job than their rivals of protecting investor capital in bad markets, while earning solid returns in good markets. Buy these funds any day the S&P is quoted at 1,262 or less with an hour left in the trading session.

Finally, a quick note on the nuclear utilities: I was pleased to see a number of them — notably Exelon Corp. (NYSE: EXC[5]) and PG & E Corp. (NYSE: PCG) — bounce back strongly from Thursday morning’s lows. Cross your fingers; maybe the panic is passing. I’ll reinstate my buy targets as soon as we get a reasonable fix on how the Japanese situation is likely to affect nuclear operators elsewhere.

  1. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  2. FMIHX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FMIHX
  3. FCNTX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FCNTX
  4. GABEX: http://studio-5.financialcontent.com/investplace/quote?Symbol=GABEX
  5. EXC: http://studio-5.financialcontent.com/investplace/quote?Symbol=EXC

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