One of my favorite trades in late 2017 / early 2018 was to short over-performing discount retailer Walmart Inc (NYSE:WMT) and  to go long on under-performing discount retailer Target Corporation (NYSE:TGT).

The thesis was pretty simple. Target and Walmart are locked in a decades-long competition wherein one retailer outperforms for a few years, and then the other comes storming back and turns into the “outperformer”. Walmart stock was a big winner in 2017 (it’s best year since 1999). Target stock was a big loser through most of 2017 (until the holiday period).

Consequently, under the idea that Target would bounce back and cause a normalization in the valuation of Walmart stock, I pounded on the table that long TGT stock and short WMT stock were the right trades to make.

I’m sticking by that call today.

Year-to-date, Target stock is up 11% and Walmart stock is down 11%. Throughout the rest of the year, Target stock will continue to outperform. Walmart stock will continue to underperform.

Here’s why.

Target’s Rebound Implies Trouble Ahead for Walmart Stock

There is no hiding it. Walmart kicked Target’s butt for the better part of the past 2 years. Walmart got its act together on the grocery and e-commerce fronts. That caused Walmart to consistently post much better comparable sales growth than Target for most of 2016 and 2017.

Naturally, Walmart stock rose some 60% during that time frame while Target stock fell 10%.

But something big happened in the fourth quarter of 2017. Target posted better comparable sales growth than Walmart for the first time in essentially 2 years (+3.6% versus +2.7% at WMT). Also for the first time in multiple quarters, Target’s digital sales growth (+29%) outpaced Walmart’s digital sales growth (+23%). And Target’s traffic growth (+3.2%) was essentially double Walmart’s traffic growth (+1.6%).

In other words, the Target rebound has begun. And that isn’t good news for Walmart stock.

Firstly, these runs of operational outperformance tend to last multiple quarters.

For most of 2012-13, Target comped better than Walmart. In late 2013 and early 2014, Walmart comped better than Target. For most of 2014 and all of 2015, Target comped better than Walmart. And in 2016-17, Walmart comped better than Target. Now, Target is comping better than Walmart, and this should last for (at least) the balance of 2018.

Secondly, Walmart stock isn’t priced for operations to be pressured by resurgent Target competition. Walmart stock had run up to historically high valuation levels on the idea that the discount retailer was running away from Target, leaving that company in the dust, and entering into the Amazon.com, Inc. (NASDAQ:AMZN) stratosphere.

In other words, people weren’t talking about Walmart versus Target like they were earlier in this decade. Instead, they were talking about Walmart versus Amazon, as if Target was dead. That shift in sentiment caused Walmart stock to trade at levels that have historically been unsustainable.

Indeed, as Target has made its comeback and sentiment has normalized, those valuation levels have yet again proven to be unsustainable for Walmart stock.

Why Walmart Stock Could Fall More

The worst part is that Walmart stock is still overvalued, even 20% off its recent highs.

Walmart’s sales growth has been between -1% and +3% over the past several years. That isn’t going to change anytime soon. A red-hot e-commerce business will push growth rates towards 3%, but competition from both Target and Amazon will keep growth from going much higher than that. Thus, best-case scenario is 3% sales growth for WMT over the next 5 years.

Margins have been under pressure thanks to the e-commerce shift, which brings with it higher fulfillment expenses and lower margins. Operating margins have fallen from 5% to 4.1% over the past several years. This pressure won’t ease up any time soon. But management is taking expenses out of the operating model, and does expect margins to expand slightly to 4.3% next year.

Thus, over the next several years, margins will be in a tug-of-war between higher e-commerce expenses and management pulling costs out of the system. I think management slightly wins that tug of war, and expect margins to grow to 4.5% to 5% over the next several years.

All together, Walmart should be able to grow sales by 3% per year over the next 5 years and get margins up to 4.75%. That combination yields revenues of $580 billion and operating profits of $27.6 billion in 5 years. Taking out $2.5 billion for interest expense, 25% taxes, and dividing by presumably a much-reduced share count of 2.7 billion, that leads to roughly $6.95 in earnings per share.

Walmart stock usually trades at 16 times forward earnings, which is also the market-average forward earnings multiple. A 16 multiple on $6.90 earnings implies a 4-year forward price target $111. Discounting that back by 10% per year, you arrive at a present value of just over $75.

Bottom Line on WMT Stock

Even 20% off recent highs, Walmart stock is still overvalued. As such, 2018 could be a rough year for this stock.

As of this writing, Luke Lango was long TGT.