Investors Should Consider Turning Neutral on Target Stock

Valuations on TGT stock have begun to approach fair value

Investors will likely remember 2019 as the year Target (NYSE:TGT) made its comeback. The retailer struggled for most of the decade as the rise of e-commerce sent the company into negative growth for a time. Target stock fell to multi-year lows in 2017 and did not consistently stay above its 2013 high until this year.

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In 2019, the TGT stock price has risen by 67% and trades near the $110 per share level. Given this run-up, investors need to start considering Target stock a “hold” rather than a “buy.”

Since the height of the retail apocalypse inspired by Amazon (NASDAQ:AMZN), I have encouraged buyers to go into Target stock. This was an easy call when the price-to-earnings ratio flirted with single digits, and the dividend yield approached 4%. At the time, it also traded at a massive discount to archrival Walmart (NYSE:WMT).

A few months ago, I stuck with this call despite a 35% increase in the stock since the beginning of 2019. Since I made that call in July, it has risen further. The year-to-date increase stands at just over 67%.

However, financial metrics indicate that investors have picked the low-hanging fruit. The forward P/E has now reached 16.8. Despite annual increases, the dividend yield currently stands at 2.4%.

Many credit store redesigns and a push into same-day delivery with orchestrating the recovery. However, according to Harvard Business School’s Srikant Datar, Target also shifted from thinking of itself as a retailer to becoming a “data company.” It used the data collected from its website to develop competencies. When it found what worked, it would roll out capabilities to the rest of the company. It also allowed managers to work with the data.

TGT Stock May Hit a Plateau

Now, these competencies have shown up in the financial data, and, by extension, in Target stock itself. Investors must ask if data can propel TGT stock further? Investors should note that its 5-year average P/E ratio is around 15.6.

Admittedly, stocks will not necessarily stop expanding their multiples simply because they reach the average. Also, the multiple is significantly lower than Walmart’s 23.4 forward P/E. With the Christmas shopping season gearing up, investors may continue to pile into Target stock as analysts forecast a 14.5% earnings increase for the year.

However, as the multiples climb, the profit outlook also begins to dim. Wall Street believes profit growth will slow to 7.1% next year. Early forecasts also indicate earnings increases will stay in the single digits after this year.

This remains a respectable growth level. However, investors could turn on Target stock as valuations continue to rise amid falling profit growth. Moreover, the next earnings report comes out on Nov. 20. Interestingly, the company’s last earnings miss came in the same quarter last year.

As for long-term holders, they should continue to stay in Target stock. The stock appears headed for its 48th consecutive annual dividend increase. At a current yield of 2.4%, the payout still exceeds S&P 500 averages. Now that the company has returned to growth, I do not see any dangers for the dividend.

However, Target stock is no longer a bargain. Those looking for outsized profits in retail should look elsewhere.

The Bottom Line On Target Stock

Amid massive stock price growth, Target stock looks increasingly like a hold. Without question, Target’s data-driven turnaround has saved the company. As a result, 2019 should go down as the year where TGT stock regained the respect of investors.

Still, with respect comes higher valuations. The ideal time to buy Target stock was when the forward P/E fell into single digits, and yields on payouts reached 4%.

Target stock can continue moving higher. However, investors who buy now make a bet that a fairly valued stock will become overvalued. They will also buy TGT at a significantly lower dividend yield and a much higher valuation.

Target has survived the retail apocalypse and should remain popular with shoppers for a long time to come. However, when it comes to buying Target stock, data analysis will likely indicate that better bargains lie elsewhere.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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