Shares of Target Corporation (NYSE:TGT) are trading at fresh two-year lows following some downbeat guidance by the company. Target lowered fiscal year 2016 guidance to a range of $5 to $5.10 from a prior range of $5.10 to $5.30.
So while growth is undeniably slowing or even stalled, at current levels Target stock is looking attractive for both long-term investors and short-term traders alike, especially considering the 10% drop in TGT stock over the past week.
Valuation and dividend yield are the major two reasons Target should be considered as a core investment. Target stock has a price-earnings ratio of under 12, by far the cheapest valuation in years and at a dramatic discount to the 25 P/E of the S&P 500.
Dividend yield paints a similar picture, with TGT fast approaching a 4% yield, nearly 50% greater than the 2.4% yield on 10-year Treasuries. The payout ratio is a very conservative 56.6%, meaning the dividend is safe. In fact, Target has increased the dividend for 44 consecutive years
. Combine that with an ongoing commitment to stock buybacks and shares begins to look like a bargain.
Click to Enlarge From a technical analysis perspective, Target stock is hovering just above major support at the $62.50 level. TGT hasn’t traded at these levels since November 2014. I look for Target to find its footing at current prices, especially given the 10% drubbing in the past four trading days.
Shares of TGT are getting extremely oversold. Nine-day RSI is under 15 and at levels indicative of an impending rally in the past. So a countertrend rally or a consolidation is likely.
Also seeing some notable call buying in TGT options post guidance, with over 5,000 TGT July $65 calls trading on Jan. 19 versus only 200 open interest. This type of big-time institutional buying is many times indicative that informed buyers think a rally may be in the offing.
So with TGT looking attractive on both a fundamental and technical basis, along with some unusual call buying, a short-term bull put spread is a conservative way to position bullishly with defined risk.
TGT Stock Options
Buy the TGT Feb $60 puts and sell TGT Feb $62.50 puts for a 60 cents net credit. Maximum gain on the trade is $60 per spread with maximum loss of $190. Return on risk is 31.58%. Breakeven is at $61.90, providing a 3% downside cushion. The short $62.50 strike price is structured at the major support level.
With earnings due Feb. 28, the trade will expire before that date and eliminate any earnings related risk. I would close out the trade on a meaningful move past the $62.50 support level while looking to have the position expire for a full profit if TGT remains well-behaved.
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.
