Target Corporation (NYSE:TGT) had enough problems as it was. Now, the Amazon.com, Inc. (NASDAQ:AMZN) pairing with Whole Foods Market, Inc. (NASDAQ:WFM) has put a tar … er, a bull’s-eye on Target’s back. And for as bad as the past few days have been for TGT stock, it appears the bottom isn’t quite in.
An already difficult retail environment has already taken its toll on Target stock and forced a restructuring of the company’s stores and sales strategy.
But the battle to recapture lost growth and market share became a lot more difficult as Amazon announced its bid for Whole Foods Market. So now, in addition to selling everything that Target sells, Amazon suddenly has a giant brick-and-mortar retail presence from where it can more aggressively push its grocery operations.
The news, out last Friday, sent TGT stock tumbling by roughly 5% to multiyear lows, and for good reason.
It’s no secret that Target has been under pressure at its physical retail locations due to changing consumer preferences, and that it’s online presence building hasn’t gone as smoothly as the charge Wal-Mart Stores Inc (NYSE:WMT) is mounting.
The Amazon-Whole Foods deal, if it clears, is bound to make the selling environment even worse. Were a merger to occur, you can expect grocery prices to get uniformly cheaper as Amazon and Walmart battle it out for market share at literally any cost.
Target’s business strategy has grown increasingly dependent on luring in customers to its stores with its own grocery deals, which already leave little profit margin. The upside? Those same customers also wind up shopping for higher-margin goods like clothing, electronics and housewares. Unfortunately, we already know Target’s business model has experienced increasing difficulty in driving sales growth.
This situation is increasingly unfriendly to TGT stock holders.
Target’s Chart
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The monthly view shows TGT has cleanly broken uptrend support, which began at the lows of the financial crisis.
The situation appears grave.
The bearish breakdown occurred following the formation of a slanted triple top. Then there’s last week’s breakdown from an existing three-month-long flat base, which only reaffirms TGT stock is still no bargain.
Target’s corrective move of around 43% from 2015’s all-time high and a decline now testing the 50%-62% retracement area for support could be viewed as a value opportunity. I get it.
Nevertheless, I’d be wary.
How to Trade TGT Stock
One Target trade of interest to me is the Aug $50/$45 bear put vertical, priced for $1.30 at the moment. What does a trader receive for entering into this position?
First, there’s the benefit of both defined risk and reduced exposure to Greeks, which are impacted by volatility and time decay.
Secondly, if all goes well (bearishly, of course), you could realize a profit of up to $3.70 at expiration if TGT stock is below $45.
The max payout would require shares to drop approximately 12%. That’s a decent decline in price, of course. But given a couple months’ worth of shelf life for the vertical and earnings potentially part of it, the opportunity is very real.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
