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TJX Stock Could Be Hit by Valuation Worries After Its Q4 Results

Discount mega-retailer TJX Companies (NYSE:TJX) is set to report its fourth-quarter numbers before the market opens on Wednesday, Feb. 26. Ahead of its results, I’m slightly concerned about TJX stock for two main reasons.

Source: Joe Hendrickson /

First, while the company’s numbers should be good, they might not be great, given disappointing holiday sales updates from other discount retailers and weak web traffic data. Second, the stock is priced for perfection, and the company needs to deliver near-perfect numbers in order for the shares to head higher. If the company’s results aren’t perfect, the stock will be susceptible to a pullback.

All in all, while I love TJX as a long-term investment, I’m not terribly bullish on the shares’ near-term outlook. I think the stock could drop over the next few months, creating a buying opportunity.

So, for now, I’m sitting on the sidelines on the shares.

The Numbers Will Be Good, But Not Great

TJX’s fourth-quarter earnings report will likely be good, and its results will probably exceed analysts’ average estimates. But its results probably won’t be great.

On the positive side, U.S. consumers are strong. Most Americans are working and getting raises. American consumers spent a great deal last holiday season, as retail holiday sales jumped 4.1% year-over-year. In that favorable holiday retail environment, TJX’s portfolio of off-price stores (TJ Maxx, Marshalls, and HomeGoods) all likely performed well, since off-price stores have done well for several years.

Given all that, it’s quite likely that TJX will report strong Q4 numbers.But those Q4 numbers won’t be great.

That’s because it looks like off-price retailers did well last quarter but lost some momentum. Off-price retailers like Walmart (NYSE:WMT), Target (NYSE:TGT), and Five Below (NASDAQ:FIVE) all reported worse-than-expected holiday sales. At the same time, the web traffic data for TJX’s main chains — TJ Maxx, Marshalls, and HomeGoods — was less-than-stellar in Q4. It’s also worth noting that margin pressures likely persisted last quarter.

So TJX’s Q4 report will likely be good, but not great, and that’s a problem for TJX stock.

Good Numbers May Not Be Good Enough

TJX stock is trading at 22.3 times analysts’ average 2020 earnings per share estimate. That’s just a stone’s throw from this stock’s highest valuation ever and 14% above its average forward earnings multiple of the last five years. At the same time, the stock is only about 5% below its all-time highs. In other words, a lot of optimism is priced into the shares ahead of the company’s Q4 earnings report.

Indeed, I think there’s so much optimism towards TJ Maxx at this point that the company will need to deliver near-perfect results in order for the shares to move higher.

But I don’t think that will happen. Instead, given the fading momentum of off-price retailers last quarter, TJX’s numbers will likely be a far cry from perfect.

If I’m right, then its shares won’t sustain their premium valuation, and they will likely pull back over the next few weeks.

The Bottom Line on TJX Stock

TJX stock is still near its all-time-high price tag and near its all-time-high valuation. That makes the stock unnecessarily risky ahead of its Q4 earnings. If the numbers disappoint investors — as I suspect they will — then the stock could fall below $60.

If the shares do drop below $60 in the wake of the company’s results, that will be the time to buy the stock. But investors should not buy the stock now.  Given how richly valued the stock is today and the fact that the company’s earnings are around the corner, investors may not have to wait long for a good buying opportunity.

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

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