Target Stock Just Broke Vital Support. Now What?

TGT stock - Target Stock Just Broke Vital Support. Now What?

Source: Mike Mozart via Flickr (Modified)

On Monday, U.S. stocks dropped in early trading before snapping back shortly after, showing the hallmarks of a potential bounce off support. By the close though, the bears were firmly in control again and that’s no different for Target (NYSE:TGT). However, TGT stock fell more than 4% in the session, as it broke through vital support. On Tuesday, TGT rebounded slightly, but failed to get back through that vital level.

It’s now got investors scratching their heads, wondering what they should do with the struggling stock. As a trader, Target doesn’t look very attractive on the long side. However, long-term investors may find the retailer now trading at an attractive price.

As it goes with most securities, it’s a measure of time. In other words, are you investing for the next five days or the next five years? Let’s explore TGT stock in a little more depth.

Valuing Target Stock

A trader may not want to touch TGT stock from the long side based on Monday’s performance. And investors are surely put off by the 25% haircut the share price has taken this quarter. So what do we make of this mess?

The selling in TGT stock really accelerated in mid-November when the company reported earnings. The results were just okay — which is not good enough in this environment — while investors were put off by the retailer’s spending. As Target competes with companies like Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT), it’s costing plenty to keep up. But that doesn’t mean those with a long-term outlook should give up on the name. After all, this isn’t Sears (NASDAQ:SHLD) or J.C. Penney (NYSE:JCP).

Right now, we’re looking at a retailer that’s investing in its future to not only survive but also thrive. So what if there are a few quarters of sacrifice if it lays the foundation for the next five to ten years? Currently TGT stock trades at less than 12 times this year’s earnings. Current estimates call for 14.5% earnings growth this year and 4% growth in 2019. Revenue estimates call for almost 5% growth in 2018 and 3% growth in 2019.

The growth in 2018 is obviously attractive, but estimates do call for a decent deceleration next year. At less than 12 times this year’s earnings and with a 3.8% dividend yield though, is the worst priced in?

Likely not.

While those considerations do make Target attractive from a long-term perspective, if the U.S. economy does slip into a recession, estimates will have to come down dramatically. That’s not a problem exclusively for TGT stock either, as it would hurt virtually all of retail.

Trading TGT Stock

chart of TGT stock
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Source: Chart courtesy of

If a recession hits, TGT stock won’t be the only one to get swept up in a wave of selling. But unlike some of its competition, it will live to see the other side. That gives long-term investors some comfort, even if they know they will feel some pain first.

Traders don’t think like that though. They will knock TGT stock up, down (and play neutral if they use options) for as long as the market will present the opportunity. So what do the charts say right now?

After Monday’s big fall, TGT went crashing through the all-important $66 level. After bursting above this mark in January, $66 has served as support multiple times throughout the year. To see the stock fall below this mark is certainly concerning. Despite a slight rebound on Tuesday, it’s still below this vital price level.

Unless TGT gets back above $66 very soon, I believe this mark could turn into resistance. In fact, the setup looks excellent for bears. Should TGT stock bounce back to $66 and fail to get back above it, I would look to short the name. As for targets, a retest-and-fail of $66 would at the very minimum lead to a retest of the December lows. Whether those lows hold or not, we do not know yet.

Should Target stock get back above $66, look first for a test of the 21-day moving average. Eventually we want to see TGT stock fill the gap back up to $76.50.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AMZN.

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