Long gone are the days when Target Corporation (NYSE:TGT) was the cool place to shop in my circle of friends and where smart money went to invest in retail. Then along came a small company called Amazon.com, Inc. (NASDAQ:AMZN) and it changed everything for brick-and-mortar retail.
Now, retail stocks like TGT and Macy’s Inc (NYSE:M) are but a fraction of what they used to be. Sure there are a few survivors like Wal-Mart Stores Inc (NYSE:WMT) and Costco Wholesales Corporation (NASDAQ:COST) but for those companies who didn’t know how to survive on thin margins, their stocks got decimated.
Fundamentally TGT stock, although it’s not expensive, it is not a screaming bargain either. It’s priced in the middle of the sector with a forward price-to-earnings ratio of 12. But most importantly to me is that its price to book is 3, which makes me think that it won’t be a massive mistake if I have to own it at a discount from here.
This morning they reported earnings and the markets hated what management delivered. The stock is down 9%. They did beat expectations but warned of a difficult upcoming season due to competition. This shouldn’t be news to anyone, as stores keep upping the ante with every season.
Technically, Target stock recently broke out from the $58-per-share area. They reached the intended measured move of $64. Now the bulls need to defend the breakout zone so they can count on it as forward support for further upside.
They are losing the battle here but there is still a chance of overshoot.
Today’s trade is bullish on TGT stock, but one that doesn’t need further upside to profit. I will sell downside risk to generate income out of thin air. If the rally happens then I would profit faster. But even if the stock falls another 15%, I can still retain maximum gains.
Click to Enlarge On down days the put premiums are over-inflated and this will change once the news is absorbed and the headlines have passed. I consider this a contrarian trade especially if the general equity market malaise lingers. I will need the bulls to buy this market dip. Else I will need to manage my trade.
TGT Stock Trade Idea
The Trade: Sell the TGT Apr 2018 $45 put and collect $1.25 to open. Here I have a 75% theoretical chance of success. Otherwise, I will own the shares and could suffer losses below $43.75.
Selling naked puts carries big risk, especially in a sector as bad as this. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the TGT Apr 2018 $45/$40 credit put spread where I have about the same odds of winning but with much less risk. If the spread wins, it delivers 15% in yield. Compare this with needing to risk $60 per share to buy the stock outright then need a 15% rally just to match the performance of the spread.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.