For about a decade, the brick-and-mortar retail stocks have suffered tremendous losses at the hands of Amazon (NASDAQ:AMZN). Some have fared better than others. Walmart (NYSE:WMT) and Target (NYSE:TGT) while they lag the S&P 500, are up around 30% in five years. Compare this to Macy’s (NYSE:M), for example, which is down 60% for the same period. Amazon is up almost 500%.
The problem is that most traditional retailers still have not figured out how to deal with Amazon stock. They are scrambling to grow their online presence yet they have to do it on thin margins because that’s how AMZN competes. This is proving to be a hurdle most haven’t legged over yet.
Yesterday Nordstrom (NYSE:JWN) reported a horrendous quarter where they missed on every mark and downgraded their guidance. The Macy’s report wasn’t that much better. Clearly they have a ton of work to do.
How WMT and TGT Stock Are Different
Conversely, this morning Target stock is up 7% on its earnings report, so clearly they are executing on plans better than most. They beat on the metrics that matter, they delivered almost a 5% comparable sales increase and they guided strong going forward.
So TGT and Walmart, at least, have had success in making the transition into the new retail world. They are growing their online sales without cannibalizing their foot traffic.
Of the two, I prefer Walmart stock for the long term just because I think it can better compete on thin margins. Amazon will continue to be the mega-threat to the industry, so the fight will be prolonged and I know that Walmart is up to it. Fundamentally WMT stock is twice as expensive as TGT if you only consider the price-to-earnings ratio. But my bet is that Walmart has the better opportunity to adapt to the next change in the game.
Furthermore, they are no longer playing defense, as we’ve seen recently that they are taking the fight to Amazon with next-day deliveries. This management team is not afraid to scrap.
Not everyone agrees on Wall Street, since Target stock is also doing relatively well. But for the past year WMT is clearly the winner of the two. So which one is the better buy today?
You’d think after touting the great job that WMT stock is doing, that I’d pick it as the favorite. But in this case, if I am not already long Walmart I’d be chasing it close to its highs. Meanwhile, TGT stock came into the earnings event near strong support zones. The area around $67 per share has been in contention for 13 years, so bulls will continue to vigorously defend it.
It is important to note that after this earnings pop, it could face resistance at $78 per share. This is a prior ledge, so there will be sellers here. However, eventually and if markets continue higher, TGT stock should be able to close the gap to $84 per share, where the next resistance and opportunity will lie.
Since the geopolitical headline risks still loom, I’d rather own a stock that has less froth built into it. For whatever reason, these two stocks are performing about the same on Wall Street, so why not bet on the one that has less to lose in case we do correct.
So in summary, while I like the job that both Walmart and Target are doing, from a trading perspective I’d rather allocate new money to Target here in this uncertain headline trading environment.
This is not the same as saying sell WMT stock to buy TGT. If I own Walmart stock already, clearly I have a winner on my hands and I should stay with it for as long as they continue to execute on plans.
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.