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.
