Can Target Bounce Back Even Higher?

| About: Target Corporation (TGT)

Summary

The thesis here is that Target is a domestic name that everyone trusts, has a 3.2% dividend yield, and has under-performed its cohorts.

It is below its peer averages in every category I look for on a fundamental basis.

I have outlined an options strategy below that has worked well for me thus far and I hope it continues to perform.

With stocks setting new record highs every day it is difficult to be sitting on the sidelines. With so much global uncertainty floating around after the Brexit vote investors should be flocking towards stocks with very little overseas exposure and a great dividend payment history. I believe I own one such stock in my portfolio and its name is Target (NYSE:TGT). The stock already occupies 8.9% of my portfolio but recently I got even more bullish on the name by purchasing the August expiration $72.50 call and funding that purchasing by writing the August expiration $77.50 call.

The stock has been beaten up for the most part since mid-April, dropping from $84 to $67 by mid-May. Since that time the stock has rebounded nicely and is trading around $75. The thesis here is that it is a domestic name that everyone trusts, has a 3.2% dividend yield, and has underperformed its cohorts such as Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST) over the past year as can be seen by the chart below. These three items match exactly what I am looking for as an investor right now.

Click to enlarge

The interesting part about the chart is that there was a massive gap down in the name after its earnings announcement in May which had the stock drop from about $73 to $65. The reason why it gapped down was because they guided earnings estimates downward for the coming quarter which they'll report on in mid-August. But in the end investors flock towards safety and great dividend paying stocks such as this one and investors have seen some great capital appreciation since that time. If the company can just deliver on the high end of that $1.20 estimate they guided for this quarter the stock should be able to shoot up.

Because the company reports earnings on August 17 th before the market opens it makes the August expiration options contracts the best way to leverage a position in the name. The stock has already filled that gap to $73 and appears to be moving higher. There was another gap in early May around $79 which I think the stock can now work up towards.

Investors have seen the jobs in America begin to grow again and this bodes well for domestic related names such as Target because it means the consumer is going to go out shopping again. On a fundamental basis the stock is not expensive at all. It has a forward P/E of just 13.2x next year's earnings estimates which makes it one of the less expensive names among its peers as can be seen from the chart below. It is below its peer averages in every category I look for on a fundamental basis.

Company

Ticker

P/E

Fwd P/E

PEG

P/S

P/B

P/C

P/FCF

Big Lots Inc.

BIG

17.6

13.8

1.3

0.5

4.2

36.7

12.5

Burlington Stores, Inc.

BURL

33.7

22.9

2.0

1.0

-

188.7

-

Costco Wholesale Corporation

COST

31.7

28.0

3.5

0.6

6.4

12.2

54.2

Dollar General Corporation

DG

23.0

18.4

1.6

1.3

5.1

145.3

42.3

Dollar Tree, Inc.

DLTR

52.4

20.8

2.6

1.2

4.8

24.4

64.8

Fred's, Inc.

FRED

-

42.0

-

0.3

1.5

88.1

31.9

Ollie's Bargain Outlet Holdings, Inc.

OLLI

37.5

25.3

2.2

1.9

2.6

41.3

-

PriceSmart Inc.

PSMT

27.0

24.0

1.8

0.8

3.9

12.0

70.9

Target Corp.

TGT

14.2

13.3

1.5

0.6

3.6

11.0

25.5

Tuesday Morning Corporation

TUES

101.3

26.6

12.0

0.4

1.5

22.7

-

Wal-Mart Stores Inc.

WMT

16.3

16.7

11.5

0.5

3.1

30.2

20.2

Min

14.2

13.3

1.3

0.3

1.5

11.0

12.5

Max

101.3

42.0

12.0

1.9

6.4

188.7

70.9

Avg

35.5

22.9

4.0

0.8

3.7

55.7

40.3

Median

29.3

22.9

2.1

0.6

3.7

30.2

37.1

Click to enlarge

Another tailwind at the company's back is that the consumer is spending again. Per the household debt and credit report it shows that the consumer is going out and spending their raises and bonuses. Since America is a consumer driven economy this bodes well for the economy as a whole, not just Target.

Click to enlarge

The risk is that if the company misses when it comes time to report earnings in August it could go lower and it can go as low as that $65 number it bottomed out at in mid-June. So the best way I thought to capture the potential upside in the name was through the August strategy I discussed earlier. So far the trade has performed well for me. Thank you for reading and I look forward to your comments.

Disclosure: I am/we are long TGT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.