We’re in the lull portion of earnings season. With the automakers, energy companies, banks and big tech all finished with their reports, investors finally have a chance to breathe. But in a few weeks, retailers are going to report and in that group, we’ve got Target Corporation (NASDAQ:TGT). What can investors expect and should they buy Target stock ahead of the report?
In short, I don’t want to buy Target stock ahead of its earnings report on May 23 and it really boils down to perception and the stock’s price action.
Perception, Perception, Perception
First, the stock market has been anything but easy. Volatility is more prominent and investors are the most skeptical they’ve been in 18 months. Even good earnings are being met with a wave of selling and tax reform is no longer providing an unexpected boost. In short, companies are having trouble wowing Wall Street — even though the quarterly results are coming in strong and mostly ahead of expectations.
That could be the case with Target too.
Making matters worse, investors are extra skeptical of retail. That doesn’t mean there aren’t winners or that the sector is in free-fall. After all, the U.S. and global economies are doing pretty darn well. But in a time where Walmart Inc (NYSE:WMT) is making moves for Flipkart, Amazon.com, Inc. (NASDAQ:AMZN) continues to dominate and where Home Depot Inc (NYSE:HD) is coming into its strongest quarter, TGT isn’t on top of the priority list.
Trading Target Stock
The other issue is on the chart.
Click to Enlarge
Where to start? The 50-day moving average just crossed below the 100-day. When the 50-day crosses below the 200-day, it’s referred to as a “death cross.” You don’t have to be a licensed securities technician to know that’s bad news. But it crossing below the 100-day isn’t exactly great.
Further, it’s breakdown two weeks ago verified a downtrend resistance line. We’re now getting into a very tight range, with support at $68 and resistance near $72. With pressure pushing Target stock lower, it might only be a matter of time before $68 support breaks. As you know, the more times a level is tested, the more likely it is to break.
If it does, a fall down to the 200-day moving average wouldn’t be a surprise. Conversely, a break over downtrend resistance puts Target stock above resistance and over its moving averages. That would change things drastically and set TGT up to retest its highs.
Valuing Target Stock
Analysts expect sales of $72.5 billion this year, up 90 basis points from last year. In calendar 2019, expectations climb to growth of 1.7%. On the earnings front, estimates call for 12% growth this year and 3.5% growth next year. For this, we’re paying just 13.3 times this year’s earnings. Further, Target stock pays out a dividend yield of about 3.5%. In short, Target’s definitely not an expensive name and it does have some growth.
With that said though, is Target stock a bad name to own? No, not necessarily. But if I’m going to bet on a company ahead of earnings — which isn’t a strategy I generally partake in in the first place — it’s not going to be on coin-flip names like Target.
Take Apple Inc. (NASDAQ:AAPL) for example. We knew the company would earn a ridiculous amount of money. We also knew it would be announce a massive buyback and still have stellar fundamentals after its quarterly results. I can live with buying AAPL ahead of the print for a longer-term investment and adding to it on a decline. (Hint: It’s still heading to a $1 trillion market cap).
I don’t want to buy Target for a longer-term investment and potentially face immediate losses if the results don’t go our way. I’d rather wait for the earnings release and look for a high-probability trade in Target stock after the fact. The one exception would be if Target breaks down to its 200-day moving average before earnings. That would have me thinking about a long position in a clear case of “the worst is priced in.”
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a position in HD and AAPL.
