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  • Target: The Analysts And Risks

    Contributor C.Cheng says:

    "According to Morningstar, 'increased competition from rivals such as Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST), and Amazon (NASDAQ:AMZN) is an ongoing threat to Target's (NYSE:TGT) share of domestic retail sales.' Furthermore, Target's expansion into Canada proved to be bumpier than predicted and they will probably not meet their projected targets. What are your concerns regarding these developments?

    "Over the course of the past year, Target has reached its 52-week low and is currently hovering near it. Do you think this is a temporary development or an indication of a fundamental issue with the company? (found here)"

    Our Response:

    The primary concern seems to be how long Target can suffer from bad execution or will the company continue to spiral down. The mention of Wal-Mart (WMT) reminds us of a previous review we did of the stock. On June 8, 2009 (found here), we had the following to say of Wal-Mart:

    "The price pattern [not increasing in value] on Wal-Mart reflects a concern by investors, starting in 2000, that the consumer economy was going to be in trouble. If the price goes above $70 or goes below $45 then we'll have some advanced warning about what may be around the corner for the U.S. and Chinese economy. Seems that this company is a leading or more reliable indicator (for the time being).

    "In general, Wal-Mart's stock is not being recognized for the simple fact that the company can generate positive earnings. Although WMT's debt really bothers me, company management may be clever like a fox by amassing huge amounts of debt now to be paid off later with inflated dollars."

    Many investors were disappointed about the fact that for nearly 10 years, from 1999 to 2009, Wal-Mart's stock price traded in a range from $40 to $65. This is an example of the risk that a retailer like Target (TGT) might face, trading in a range for an extended period of time.

    However, the premise of the 2009 Wal-Mart article was that if, over an extended period of time, the company can continue to maintain earnings, increase or retain margins, borrow prudently and decrease shares outstanding there is a good chance that value of the company will increase. Not long after the 2009 Wal-Mart article, with the stock trading at $49.84, the shares of WMT broke out of the $65 resistance level and increased to the most recent high of $81.37, an increase of +63%.

    Our purpose of tracking stocks that have a history of dividend increases, like Wal-Mart and Target, is to determine values and the competency of management. The decision to increase dividends cannot be sustained over an extended period of time if management is incompetent, perpetuating fraud or willful negligence. When we acquire a stock like Target at depressed levels, we're indicating that the problems faced by the company, although a current drag on the stock price, will be resolved in due time. Keep in mind that downside risks should always be a consideration.

    A secondary concern that is worth addressing is the source of analyst reviews and the quality of such reviews. For example, Deutsche Bank Markets Research provided this analysis of an investment downgrade of Target on July 12, 2013, within 2 weeks of the top ($73.50) in the stock price on July 24, 2013.

    (click to enlarge)

    Although DB was not in the position to offer a pure sell recommendation, a failing of most research shops, the downgrade with an upside target that was spot-on indicates the high quality of the research that was done. We recommend you get a copy of this report to see what the risks were, according to DB, in advance of the subsequent decline that had ensued.

    Contrast the Deutsche Bank downgrade on July 12, 2013 with the Piper Jaffray review on July 9, 2013 which gave Target the highest rating possible of Overweight, essentially a buy recommendation two weeks before the peak.

    (click to enlarge)

    Piper Jaffray essentially gave a buy recommendation of the Target within 4% of the high. Additionally, the stock was expected to increase to $80. This is a report that is worth contrasting to the DB report. We'd eliminate the points that are similar and focus on the differences as the defining piece to the quality of the analysis, in favor of DB.

    A challenge with Morningstar reports is that they have a cookie cutter approach that is easy to identify the weaknesses. Below is an excerpt from the Morningstar Report dated July 8, 2011 when Target was trading at what was later to be revealed the low in the stock price from the January 3, 2011 peak.

    (click to enlarge)

    Just to highlight what was said by Morningstar, at the time:

    "Increased competition from rivals such as Wal-Mart, Costco, and Amazon are ongoing threats to Target's share of domestic retail sales."

    It appears that Morningstar's overall risk analysis does not change whether at a low in the price or at a high. Because this was a general risk assessment we wouldn't put much emphasis on this particular warning on the stock. However, the most informative assessment of risk within a Morningstar report is usually the section titled "Bulls Say" and "Bears Say".

    Although normally a good summary of both sides of the matter, the case for and against Target, as made in the Morningstar report dated May 27, 2014 are essentially offsetting points as the "Bull Says" section indicates, "PFresh and REDcard should help to drive store traffic, delivering enough expense leverage to offset the negative impact on gross margins from those initiatives." While the "Bear Says" section suggests, "Target's ROICs have declined since the PFresh initiative transitioned a larger portion of assets to lower-return food business." Usually, this section is better at outlining the risks and potential benefits of ownership of the stock. For Target it wasn't particularly enlightening.

    Our own recommendation of Target on June 24, 2011 (found here), at the low, was as follows:

    "Target (TGT) landed in the third spot after Fitch cut its debt rating. They've taken the rating down from A to A- on claims that Target is aggressively buying back its own shares and remodeling stores in Canada. We've said it before that shares of Target look attractive at a 2% yield but it's even more attractive at a 2.59% yield. This yield boost was because the companyraised its dividend by 20%, from $0.25 to $0.30 per share. Once again, IQTrend has estimated that Target is a good buy when it reaches a 1% yield."

    We believe that understanding the downside risks are vital to the success of any investment that is ever made. Additionally, the quality and consistency of such assessments should line up a majority of the time. In the particular case of Target, the risks are still out there, however, we believe that the history of the company's management team ensures that the problems are being addressed which may include taking the losses by closing the Canadian stores and cutting or leaving the dividend unchanged.

    Disclosure: The author is long TGT.

    Tags: TGT, WMT, COST, AMZN, Target
    Jun 11 9:09 PM | Link | Comment!
  • Gold Stock Indicator Review

    On June 7, 2013 (found here), we said the following of gold (NYSEARCA:GLD) and gold stocks (NYSEARCA:GDX):

    "…the pattern has typically been that when the stock market swoons, so does gold stocks and to a greater degree. If the Dow Jones Industrial Average cannot maintain the current level gold stocks will decline massively."

    For a brief moment, from June 7, 2013 to June 24, 2013, the Dow Jones Industrial Average declined approximately -3.5%. In the same period of time, the price of gold declined -13% while the XAU gold stock index declined -22%.

    (click to enlarge)

    On the whole, precious metals investors need to etch the following comments from Charles H. Dow into their mind:

    "For the past 25 years the commodity market and the stock market have moved almost exactly together. The index number representing many commodities rose from 88 in 1878 to 120 in 1881. It dropped back to 90 in 1885, rose to 95 in 1891, dropped back to 73 in 1896, and recovered to 90 in 1900. Furthermore, index numbers kept in Europe and applied to quite different commodities had almost exactly the same movement in the same time. It is not necessary to say to anyone familiar with the course of the stock market that this has been exactly the course of stocks in the same period ( source: Dow, Charles. Review and Outlook. Wall Street Journal.February 21, 1901.)"

    When Charles Dow speaks of commodities, gold and silver (NYSEARCA:SLV) should be included in the category. Accepting this reasoning will provide precious metal investors with the necessary risk planning thought process, hopefully before investing in the sector. Even if the decline in the Dow Industrials does not lead to the decline in gold stocks in every instance, it is better to be prepared for an outcome that occurs a majority of the time.

    At the time, our Gold Stock Indicator had the following trend:

    (click to enlarge)

    Our GSI was at the "stage 3 buy" level and it looked like the upside resistance was to the "stage 2 buy" level. However, we did hold out the possibility that the "stage 4 buy" signal was still on the horizon. The "stage 4 buy" level was indicated on June 26, 2013 in our posting titled "Gold Stock Indicator: Now Is the Time" (found here).

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: long physical gold and silver

    Jun 07 10:36 PM | Link | Comment!
  • Watch List Performance Review

    Performance Review

    In our Nasdaq 100 (NYSEARCA:QQQE) Watch List from May 24, 2013 (found here), we had the following performance of the top five stocks (May 24, 2013 to May 23, 2014):

    SymbolName20132014% change
    TEVATeva Pharmaceutical39.3451.7731.60%
    INTUIntuit Inc.57.979.5937.46%
    NUANNuance Communications, Inc.19.2115.8-17.75%
    GRMNGarmin Ltd.35.1257.3963.41%
    ISRGIntuitive Surgical, Inc.501.53363.86-27.45%
    ^NDXNasdaq 100 Index  22.95%

    The top five stocks underperformed the Nasdaq 100 (NASDAQ:QQEW) by -5.50%. However, the stock that we had a strong interest in, Teva Pharmaceutical (NYSE:TEVA), garnered the following commentary:

    "…Teva appears to have all of the attributes that we're looking for in both the short and long-term. Teva has earnings that can support a reasonable dividend with a margin for error if annual earnings were to decline -40%. According to Value Line Investment Survey, Teva is selling 70% below fair value based on 2012 cash flow of $7.44 per share. For all intents and purposes, we believe that Teva has long term viability…"

    "…The strategy for taking advantage of the relative low in the price is to break the purchase of Teva into 2 or 3 stages. In either scenario, buying now would be a reasonable reaction to the current price."

    TEVA never fell as low as we had expected. However, the recommendation of purchasing TEVA at the price indicated was appropriate and has generated reasonable gains.

    We'd like to add that while our overall list from last year didn't exceed the market, it would have done much better had we excluded Intuitive Surgical (NASDAQ:ISRG) and Nuance Communications (NASDAQ:NUAN). We believe that ISRG could be excluded because on March 19, 2013 (found here), we said the following of the stock:

    "The next stock of interest is Intuitive Surgical (ISRG). The last time the stock was our watch list was in November 26, 2010 at a price of $275.08 (found here). As with our observation onApple's (NASDAQ:AAPL) contracting volume as the price rose, ISRG has experienced the same phenomenon (found here). In addition, as ISRG has declined recently, the amount of average volume has increased dramatically. This suggests that there may be support for the idea that this stock could fall much lower from the current levels.

    (click to enlarge)

    "According to Dow Theory, ISRG has downside targets of $426.91, $342.92 and $258.93. We think that $426.91 AND $342.92 are a lock for the downside risk. A decline below $342.92 suggests that $299 and below is the next target."

    We believe that pointing out the conflicting trend of price and volume was fair warning that ISRG was at risk of continuing the declining trend. As recently as May 9, 2014, ISRG has decline as low as $346.46 or within 2% of our Dow Theory downside target. Nuance Communications (NUAN) was not highlighted as a stock of interest to us within the last year.

    On the opposite side of our "negative" view on ISRG or absence of interest with NUAN, our commentary on Intuit (NASDAQ:INTU) is best represented in our review of the stock from our June 7, 2013 watch list (found here):

    "While Garmin (NASDAQ:GRMN) appears to be the best value on our Watch List this week, Intuit (INTU) seems the most compelling. Applying Dow Theory to Intuit's price we get the following downside targets:

    • $51.98
    • $44.03
    • $38.08

    (click to enlarge)

    "Based on Dow Theory, Intuit has a minimum downside target to the 1/3 level ($51.98) which seems to have provided a surprising support level at the red arrows. However, this is price action within a confirmed bull market. What we want to know is what could happen if we enter a bear market.

    "In the decline from the October 2006 peak to the December 2009 trough, Intuit fell as much as -43.54%. If Intuit were to decline by a similar amount from peak to trough, the stock would fall as low as $38.62. Our bear market calculation almost matches our lowest Dow Theory downside target of $38.08. Finally, if we assume a -43.54% decline from the current price of $59.46 we arrive at a price of $33.47, this is only 12.10% below the Dow Theory low. The bottom line on Intuit is that the downside risk is fairly limited."

    Excluding the performance of NUAN and ISRG, our watch list would have gained +44.16%. While we can't take credit for all the coincidental postings and the subsequent performance, we hope that our measured approach to analyzing these stocks has broadened your perspective as an investor.

    Jun 02 1:04 AM | Link | 2 Comments
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