The case for buying Target (NYSE:TGT) stock at current levels is reasonably simple. Target stock is cheap, as TGT stock trades at less than 13 times analysts’ consensus 2020 earnings estimate. That’s a historically low multiple for TGT and one that looks relatively muted in the context of the industry.

Indeed, rival Walmart (NYSE:WMT) trades at a full 20 times next year’s consensus earnings-per-share estimate. Yet TGT stock is priced much closer to low-growth department store plays like Kohl’s (NYSE:KSS) and Nordstrom (NYSE:JWN), each of whom trade at similar 12x-13x P/E ratios.

Given that Target’s comparable sales should rise 5% this year, based on the Q4 guidance that it updated earlier this month, Target stock simply looks too cheap. While Kohl’s and Macy’s (NYSE:M) reported disappointing holiday results, Target posted an excellent performance.

And it would seem that Target’s omnichannel initiatives have put it back on track, leaving it poised to deliver more growth in fiscal 2019 (which ends in January 2020) and beyond.

But I’ve long been a skeptic when it comes to Target stock and truthfully, I still am. The company’s FY18 performance was impressive, particularly on the top line. But its profits have remained weak, as its margins are being pressured by its omnichannel efforts. In other words, Target is buying some of that revenue growth, while also benefiting from easier comparisons.

The easier comparisons will end in fiscal 2019, but the elevated spending won’t. And with Target still behind Walmart and still facing years of pressure from Amazon.com (NASDAQ:AMZN) and other online pure-plays, investors shouldn’t expect TGT to grow too rapidly. Thus, the valuation of Target stock shouldn’t be as high as it is.

Q3, Q4, and TGT Stock

I wrote ahead of Target’s Q3 earnings report in November that the results were important for Target stock. Most notably, Q3 ended a string of easy one- and two-year comparisons from a sales and profit standpoint. Adjusted EPS didn’t move much in the two prior years — it came in at $4.69 in fiscal 2015, and $4.17 in fiscal 2017 – and the company’s operating income and margins declined over that period.

Target’s growth in its first three quarters looked impressive, but they benefited from comparisons to its weaker performance in prior periods. As a result, Q3, the last quarter in which Target had a truly easy comparison, needed to look hugely impressive to show that TGT was on the right track.

Simply put, the Q3 results weren’t that impressive. Target missed the consensus estimates, and TGT stock, which came under added pressure from the nervous stock market, plunged, Target stock subsequently lost 30% of its value in about seven weeks.

TGT now has bounced 20% off those December lows, partly because its Q4 outlook has improved, as same-store sales growth in the range of 5% is better than pretty much everyone else in the space. And that’s on top of a 3.6% increase in the prior year.

Because of the easy Q3 comparisons, if an investor wants to turn bullish on TGT stock ahead of fiscal 2019,  Q4 is more important than Q3. And as skeptical as I am, I do think that the company’s Q4 results could be good. Still, looking forward, I’m not sure that Target stock is nearly as cheap as it looks.

My Concerns About Target Stock

I have several broad concerns about TGT, which echo my worries about the retail sector as a whole. First, Target’s earnings growth – even after factoring in its improved FY18 results – is close to zero.

The company’s FY18 EPS should come in at $5.30-$5.50, versus the $4.69 it posted three years ago. But basically all of that increase will come from a lower tax rate. The effective tax rate in FY15 was 32.5%; it should be closer to 19% on an adjusted basis this year. Pre-tax earnings per share actually have declined over that stretch, and they look poised to drop again in fiscal 2019.

The declines are a direct result of the second issue: omnichannel retailing isn’t cheap. Target and Walmart (and others) are rolling out myriad ways to shop, and all those options cost money to launch and support. And the razor-thin margins in retail (Target’s operating margins are under 6%) don’t leave a lot of room for extra costs. Target is driving sales growth by making shoppers’ lives easier, but it’s paying significantly for that growth.

And while Target’s sales growth seems impressive, it should be impressive. It is, after all, a retailer in the tenth year of an economic expansion. Target’s performance ought to be good right now because it’s not going to be great when the macro cycle eventually turns. So if Target can’t grow its earnings in this environment, when will it be able to do so?

Why You Should Avoid TGT Stock

So, yes, TGT stock is cheap. But there are good reasons why it’s cheap. Target isn’t a leader of the retail sector. Most of its investments of late have been reactive, not proactive. And they’re being duplicated by most of the company’s competitors, including Walmart.

It’s possible that Target’s results will be boosted in the next few years by the demise of a number of its competitor. (The bankruptcy of Sears Holdings (OTCMKTS:SHLDQ) definitely will be a tailwind for TGT stock.) Target’s spending growth should moderate over time. And 13 times EPS isn’t a terrible price for TGT stock.

But in the context of the cyclical situation and margin pressures, its valuation is not compelling, either. And it’s tough to see a catalyst on the horizon. Strong Q4 results are likely priced into the stock after its recent bounce, and its FY19 guidance probably won’t differ much from the consensus outlook. I’d be loath to own TGT stock into its earnings report, given the current agitation of the stock market.

Target’s valuation isn’t low because the market hasn’t been paying attention to TGT. Rather, investors are looking at what’s in store for Target. And it will have some challenges ahead, with the macro cycle destined to turn at some point, its spending  likely to continue to be elevated, and its comparisons becoming quite difficult this year. From that standpoint, TGT stock is cheap, but it’s cheap for a number of good reasons.

As of this writing, Vince Martin has no positions in any securities mentioned.