The shares of Target (NYSE:TGT) rallied hard ahead of the retailer’s second-quarter earnings. While other names did the same and failed to jump despite their solid results, Target stock erupted on the day of the report. soaring 12.6%.
That move came after the shares had climbed to all-time highs and after they had rallied nearly 17% in the five weeks proceeding the company’s earnings.
So Target stock made a big move in the wake of the retailer’s impressive earnings. As someone who follows stock prices and technicals closely, I believe that the surge was even more impressive given the price action of Target’s peers.
Walmart (NYSE:WMT), Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) were all rallying into their earnings. But despite all three of them turning in strong results, none of them was able to rally on their reports.
I view this relative strength of Target as a bullish catalyst. Rather than believing that Target stock can’t climb further, I think it may still have room to run.
Valuing Target Stock
Target’s Q2 earnings per share of $3.38 easily topped analysts’ average estimate of $1.65. Its revenue of $22.98 billion grew almost 25% year-over-year and beat the mean estimate by almost $3 billion.
Those numbers are huge for a big-box retailer, but they get even better. Its comparable-store sales soared 24.3% year-over-year, setting a new record and coming in way ahead of the average estimate of 8.6% growth. Target’s digital sales soared 195% YOY, while its operating margins came in at 10%, versus the average estimate of 5.7%.
Some retailers have talked about the strong momentum they had in Q2 slowing in Q3. That makes sense because, although the work-from-home shift is continuing, it began in earnest last quarter. As a result, demand for pantry items, workout equipment, and entertainment options ballooned as the coronavirus crisis began.
Will Target’s momentum slow in Q3? I’m not so sure.
On the company’s Q3 earnings conference call, CEO Brian Cornell said that, “August comps are off to a very solid start with low to mid teen growth at this point in the month, and it’s been broad based.”
Target has a unique combination of essential supplies (cleaning, hygiene, groceries, etc.) and non-essential items. Throw in its e-commerce efforts, the back-to-school catalyst and the upcoming holidays, and it’s hard not to like Target stock, even after its huge rally.
The Bottom Line on Target Stock
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Keep in mind that even before Covid-19, Target was doing well, as it soared 94% in 2019. So it’s not like this name was struggling and the pandemic is saving it. With or without a pandemic, Target is a winner.
Target stock actually peaked in December 2019 and fell in January. The stock didn’t hit new highs until August of this year. That’s why I think Target could rise further over the longer term, even if it occasionally pulls back along the way.
The shares did a great job of breaking out over their downtrend resistance (depicted by the blue line in the chart) in July, then rising above their prior highs near $128 and holding that level as support in August. However, the post-earnings rally is failing to clear the 161.8% extension.
So here’s what I want to see now. I’m either looking to buy Target stock on a dip or on a breakout. On a dip, I’m watching the 10-day moving average. However, a decline below the post-earnings low at $146.54 puts the 20-day moving average and gap-fill toward $139 in play.
On the upside, I want to see a breakout over the 161.8% extension and the current high at $156.10. Above that opens the door to the two-times range extension at $170.31.
With the S&P 500 at new all-time highs, the risk now is that there will be a market-wide correction. That’s why it’s important to know the downside levels of Target stock and to be conservative about the number of shares purchased after such a big move.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.
