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Don’t Jump into Red-Hot Target Stock Until It Cools off a Bit

Target stock has been hot, but the rally may take a short pause soon

Between Aug. 8 and Nov.21, Target (NYSE:TGT) staged an impressive rally. Target stock went from a low of $80.03 to a 52-week high of $127.97.

Don't Jump into Red-Hot Target Stock Until It Cools off a Bit
Source: Robert Gregory Griffeth / Shutterstock.com

The Minneapolis-based retailer has 1,868 stores and 41 distribution centers across the U.S. It has shown strong growth in recent quarters and I expect the positivity to continue.

Therefore, I suggest that long-term investors consider adding Target stock into a diversified portfolio. However, there will likely be short-term profit-taking in the shares which investors should anticipate. Let’s see why…

Target Stock Delivered Robust Q3 Results

On Nov. 20, Target released quarterly results that highly pleased investors. Management delivered a quarter of higher sales in stores and online.

Revenue hit $18.67 billion vs. $18.49 billion expected and earnings per share came at $1.36 vs. $1.19 expected.

Comparable sales at stores open at least a year and online grew 4.5% YoY. It was a full percentage point above what Wall Street expected.

The report said that digital sales surged 31% during the quarter, mostly thanks to the same-day offering. This was also welcome news as Target’s shift into multichannel selling is on track.

Analysts were quite impressed that Target saw apparel sales jump 10%. For comparison, elsewhere in the space Kohl’s (NYSE:KSS) blamed the warm weather in September for consumers delaying purchases of winter clothing.

About 90% of retail sales still take place in stores nationwide. And Target has been investing in its stores by remodeling them. It has also been opening smaller-format stores to bring in the foot traffic.

Recent research led by Gian-Claudia Sciara of the University of Texas, Austin highlights that “Big box stores have proliferated across the United States in the last three decades. Proponents have praised them for providing affordability and convenience to consumers.”

Target customers can purchase products both in stores or online. They also have access to a wide range of general merchandise, apparel, toys, and food. Its offerings appeal to various income groups.

In 2018, CEO Brian Cornell had said that he would like to make Target, “America’s easiest to shop store.” Recent quarterly results by Target show that management is able to execute well on that mission and get customers to visit its stores as well as shop online.

TGT Stock Faces Intense Competition

The National Retail Federation estimates retail sales in November and December will grow between 3.8%-4.2% YoY. In other words, the U.S. consumer is still strong. And investors are clearly hoping that Target stock will benefit during the holiday shopping season.

In the quarterly result, the discount retailer indeed raised its earnings guidance going into the weeks of the year.

Many investors would, of course, be aware that retailers have been facing increased competition ever since the birth of eCommerce has disrupted the brick-and-mortar business model.

In the retail space, recent years have seen a clear split between winners and losers. And over the past year, TGT stock has clearly joined the winners’ camp.

By market share, Target is one of the top ten retailers in the U.S. It faces competition from other important names such as Walmart (NYSE:WMT), Costco (NASDAQ:COST) as well as Amazon (NASDAQ:AMZN).

Most retail stocks are momentum-driven, so they usually experience big price swings, especially around earnings. Thus Target stock can easily gap up if the numbers are better than expected. Or it can easily gap down if the numbers disappoint too.

Retailers have also been among the most front-and-center companies in the U.S.-China trade war.

In case of an upcoming poor holiday season update by a competitor or a negative development in the trade rhetoric, the industry or the overall market may easily decline.

If there is any disappointment in holiday sales numbers, investors could easily become skeptical that Target can continue to grow profitably. Then Target shares would also be adversely affected.

We are likely to hear more about the fierce battle among big retailers and online stores in 2020 too.

Short-Term Technical Charts Urge Caution

The Target share price is a testament to the company’s fundamental strength as year-to-date, the stock is up an eye-popping 91%! Currently, the stock is hovering around $126.

Due to the impressive run-up in the Target stock price, especially in the past few months, short-term technical indicators have become somewhat overextended. Investors who pay attention to short-term oscillators should note that Target looks “overbought.”

So, in the coming days, there might be some profit-taking. It’s likely that a lot of good news has already been priced into the TGT stock price.

I would not advocate bottom-picking in case of near-term price weakness. Yet, I find Target stock to be a compelling buy candidate as the price drops toward the $110 and even $100 levels.

Therefore, if you already own Target shares, you might want to hold your position and ride out any potential short-term decline. Or if you are an experienced investor in the options market, you may want to protect your portfolio with a covered call with about a two-month time horizon.

Finally, if you do not yet hold TGT, you may want to wait several weeks, such as until the release of the next quarterly results, to buy into the stock. Then you could analyze if Target will be able to back up the current optimism with hard holiday sales data.

The Bottom Line on Target Stock

A study led by Thomas Powers of the University of Alabama at Birmingham concludes that “discount retailing is characterized by fierce and ever-changing price competition with sales accounting for 12.5% of all retail sales in the U.S.”

I believe that the new decade would likely see new highs for the TGT stock price thanks to the growth tailwind in the business and execution by management.  Sales growth is near a decade-high, in part due to booming e-commerce demand.

And anyone who buys into TGT stock can also enjoy dividend income, which now stands at a yield of 2.1%.

Yet, the next few weeks can witness profit-taking in the Target share price. In that case, I’d regard any potential dip in the price as an opportunity to grab the shares for the long term.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/12/red-hot-target-stock-cools/.

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