Target Corporation: TGT Stock Is a Great Contrarian Play

Target Corporation (TGT) has been up and down in 2016. After starting the year weak, it made a nearly 20% run from February to April, then broke down again to finish about breakeven, year to date.

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That begs the question: What does the rest of the year have in store for TGT? Will Target stock continue its descent, or will it once again rise to the occasion and finish strong?

Given some of the transitions TGT has undergone this year, including the restructuring of its business model, the latter is more likely.

The fact is, Target still can’t get out from under the recent memories of the massive data breech, the shuttering of Canadian operations and the reworking of the franchise’s entire business model, including beefing up its online presence.

We’re not even two years into this transition and there’s no doubt that clear sailing is overly optimistic, given the retail space at the moment. One thing is certain, TGT needs to boost its sales.

Its two major campaigns are online sales and expanding grocery operations.

Target CEO Looking for Growth Through Restructuring

Target appeals to busy middle-class families; from store locations, they can grab sun tan lotion, a bathing suit and camera, as well as munchies and drinks, all in one place. And, there’s a decent selection of options. According to an article at The Motley Fool, TGT offers 80,000 items compared to Costco Wholesale Corporation‘s (COST) 4,000.

Now COST and TGT have significantly different revenue models — COST makes most of its money from membership revenue, rather than product sales — but the point is, TGT remains a very popular stop for busy families.

CEO Brian Cornell knows that one thing families want is quality products at good prices. With a mom and kids in a store for socks, having groceries right there is more than convenient. This is precisely why Target’s Market Pantry brand items bring in more than $1 billion in sales annually, according to Forbes.

Cornell has made it clear that he wants to make this retailer a much more compelling food operation, and he knows just how to do it. He was the former CMO and executive VP of Safeway Inc (SWY) before leaving for PepsiCo, Inc. (PEP) and then Target. He also recently hired a former SWY colleague to help with this transition.

TGT is redesigning its store brands and increasing its organic offerings. This is very promising since getting consumers to buy from TGT instead of heading to a competing grocery store could really boost same store sales. And, reasonably-priced organics is a massive trend across the food industry.

TGT has also beefed up its online sales channels. It saw a massive 34% bump in online sales over the past holiday season, and its momentum has continued into 2016. Internet sales are up 10% this year and have helped make up for weaker same store sales in recent quarters.

Bottom Line on Target Stock

Most of the challenge lies with the economy and the kind of jobs that are created in the economic recovery. If good jobs are created, consumers will spend up. If not, consumers will continue to be very price-sensitive and tailor their spending accordingly. That means Target loses some of its allure.

But, the TGT story is a long-term one. Cornell & Co. have done a great job turning this company around in very rough seas. Target stock’s 3.3% dividend also helps buy some patience from investors. The point is, there’s far less downside risk now than there is upside potential. You’re not trying to catch a falling knife, you’re buying a contrarian poster stock.

Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.

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