For a long while, the retail sector has not gotten much respect on Wall Street. This is probably a lingering effect due to the shellacking that retail stocks received from the onset of the phenomena that Amazon (NASDAQ:AMZN) brought down upon them over a decade ago. Brick and mortar retail did have stints of optimism last year where the group came back in favor but only to crash into Christmas right back into five-year pivot support. Target (NYSE:TGT) fared relatively better than the collective. Target stock put in a higher low in December, easily beating the one set in the fall of 2017.
This is constructive price action from the long-term charts that’s better than say Best Buy (NYSE:BBY).
Case in point, Monday — on a day where the equity markets saw panic selling — TGT closed only down 0.40%. Compare this to the SPDR S&P Retail ETF (NYSEARCA:XRT) that fell 2% on the same day. This was going into the uncertainty of the company’s earnings report, which it delivered this morning.
TGT even beat typical high flyers like Salesforce (NYSE:CRM), which fell 4% going into its earnings event.
This morning, Target stock is flying high up 4.4% on a strong earnings report. Management beat expectations, especially in holiday comparable sales. This number was in question because of the disastrous December retail report that shook the sector a few weeks ago. Yet, here is another actual result report that contradicts the anomalous number.
These days, investors demand that not only companies beat expectations, but also raise forward guidance. TGT did just that and raised its guidance range for the full year of 2019. This propagates an air of confidence that translates into stock buying action on Wall Street.
Year-to-date, TGT stock came into the earnings report already up 10%. This is double that of what Walmart (NYSE:WMT) and almost inline with the S&P 500. All this is to say that Target stock has its fans on Wall Street, which means that management is doing things right.
Yet most analysts who cover it rate it as a HOLD and therein lies the opportunity. Some of these analysts will have to upgrade Target stock because management sounds like they are executing on a consistent plan.
Maybe this is the time to go long a stock that just delivered a beat and raise. The momentum is clear and there is more upside opportunity than downside risk from here. This makes a good base for TGT bulls to work off.
Target has rallied in the face of market-wide adversity with the tariff headlines. This is investors voting with their actions. Since they don’t ring bells at perfect entry points, risking some money on a bullish bet here is not likely to be a mistake, so it’s worth the try.
Fundamentally, TGT stock is cheap selling at a price-to-earnings ratio of 13, which is three times cheaper than WMT. Management is addressing the AMZN threat by using their online sales so retain market share. They seem to have embraced the shift in shopping patterns and their plans are working. However, I still remain skeptical that the collective brick-and-mortar online efforts, in general, are not taking back sales but rather merely stopping the bleeding for now.
Bottom Line on Target Stock
The macroeconomic environment still favors the retail sector, especially in the U.S. We have full employment and consumers still have a strong spending appetite. So the sector is likely to continue strong. If the stock markets rally from here, then TGT is likely to be in the lead pack. Conversely, if the bears succeed in creating another correction, then Target has shown relative strength, so it may hold up better.
This morning’s pop in TGT almost fills a huge gap from its last earnings report. This came after Target stock collapsed from Nov. 12. So there is a lot more work to do in order to recover all the red candles all the way back to $87 per share.
This is a lot of room to cover and there is likely resistance along the way, especially at $80 and $83 per share. I don’t like chasing big pops, so I may want to hold out another tick before buying shares on this rally. Sometimes it’s best to nibble first, so taking a position in tranches makes the most sense. This way, if it rallies, then I am already in. If it falls, then I will have the opportunity to average into a reasonable position in TGT.
Conversely, if TGT stock falls below $71.70 I would expect another test of $67 per share. While this is not a forecast, it is a scenario that lurks below. The rhetoric in the media is that the stock market is long in the tooth here, so a correction may become a self-fulfilling prophecy. I am not of that opinion, but I won’t be surprised if we talk ourselves into a small correction here before the next leg up in equities.
The bottom line is simple. The Target team is executing well and the results prove it. Those who want to buy a quality retail stock ought to consider it for their portfolio. It has far less froth to shed than a lot of the other competitors.
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 as @racernic on Twitter and Stocktwits.