Target Corporation (NYSE:TGT) reported earnings and Wall Street didn’t like what they saw. Even though the company beat on the top line, they missed their earnings estimate. Under normal circumstances a penny miss wouldn’t be a big deal. However, in this case, TGT stock is known to be one that guides conservatively, which makes this miss even more disappointing than just one penny.
Higher labor costs were an issue. Management should have been able to forecast this since they chose to invest in their people as part of their operating plan. Digital sales looked good, which makes the higher labor cost even more puzzling to me.
So far, I sound negative, but I am sharing a bullish position in Target stock through the next few months.
How to Trade TGT Stock
Instead of buying the shares outright, especially when equity markets are near all-time highs and with so much uncertainty in the current macroeconomic picture, I will use Target options instead. There I can build a buffer between the current price and my risk.
Retail shopping is migrating to a digital format and I think they have enough foray into that arena to eventually figure it out. I used to go to TGT at least once a month, now I can’t even remember the last time I went there. Maybe it’s the fact that my son is now older, which tells me that they have some work to do to widen their demographic targets.
Management is solid and I have faith that they will succeed in the mid- to long-term.
Fundamentally, TGT stock is not bloated. Its price-to-earnings is more expensive than Macy’s Inc (NYSE:M), but much cheaper than Walmart Inc (NYSE:WMT) or Costco Wholesale Corporation (NASDAQ:COST). I am confident that if I own the shares at a further discount from here, it won’t be a disaster.
Wall Street may be a bit overzealous about TGT stock. There were late upgrades and most analysts rate it as a buy, yet it is now trading near their average price target range. This is thanks to an astronomical 45% rally off the November 2017 earnings report.
But TGT stock had been there before. In is important to note that the November rally merely brought it back to its levels from a few months earlier to finish the 2017 year “flattish”, even after the huge spike. Using TGT options gives me confidence that I won’t be in danger if my timing ends up being less than perfect.
Technically, I do see upside technical potential, especially if the price breaks above $79-per-share. Bulls could then retest the 2015/2016 highs. But I am not chasing it. Instead I bet that support will hold for the next few months. I see several layers, but the immediate pivotal zone is around $69 and it is over 10 years old.
The Bet: Sell the TGT JUL $60 put and collect $1.50-per-contract to open. I have an 85% theoretical certainty, so that I retain maximum gains. Otherwise, I will accumulate losses below $58.50.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Bet: Sell the TGT JUL $60/$55 bull put spread. Here, my risk is smaller, yet the spread would yield 12% on risk. Compare this with risking $74 to buy the shares and leave no room for error.
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 at @racernic on twitter and stocktwits.