Target, Wal-Mart Moves Are Overwrought

|
Includes: CVS, TGT, WMT
by: Dana Blankenhorn

Summary

Target plunged after earnings this week while Wal-Mart soared.

Target issued a cautious outlook, Wal-Mart an optimistic one.

Politics likely had little to do with either move.

The moves in Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) after earnings this week are overdone, and will adjust after a few investors get fleeced.

Target dropped 7% after first quarter revenue was down 5.4% from a year ago, to $16.2 billion. Wal-Mart shares surged 8.8% after revenues were up 1% from a year ago, to $115.9 billion.

The results are statistical noise, and the fall in Target sales should have been expected, as it sold its pharmacies to CVS (NYSE:CVS) last year for $1.9 billion and only now stopped counting those revenues. The negative comparison caused by the sale will come off in the next quarter, and absent pharmacy same store revenue was up about 1.2%. Sales at Wal-Mart stores open a year were up 1%.

So why the big moves? Two reasons.

First, Target issued a cautious outlook, while Wal-Mart issued an optimistic one. For mainstream retailers, outlooks like this are basically guesses, based heavily on expectations for overall economic activity. Right now, you can make an argument either way, and while Wal-Mart is taking the optimistic view Target is taking a more cautious one. Is that worth a roughly 15% swing in relative stock prices - taking Target's losses against Wal-Mart's gains? I don't think so.

Second, politics. Target was ahead of the Obama Administration view on transgender bathrooms, and thus made itself (what else) a target. One woman in Ohio marched through a Target store protesting with her kids. Activists said 700,000 had signed petitions against the policy.

Now if you really think that forcing a teenager with an unclear sexual identity to use a bathroom based on their birth certificate is a salient, long-lasting, and an investment trend, then bless your heart because I'm not going to argue the point. But history shows political protests fade quickly, once a new cause is found, and that they seldom remain relevant to companies with sales of even $72 billion/year, let along $450 billion/year.

It is far more likely that the cold spring in the Northeast cut into Target's revenues for the quarter than that this political issue did it. And even if I am wrong in this, the issue is going to go away, especially since Wal-Mart is going to obey the law (whatever courts determine it to be).

The rational trade is obvious. Next week, pair Target long options against Wal-Mart short options. Over the course of the next few months you will probably do very well. I don't do such trades in my retirement account, but if I were to buy either of these stocks I'd probably take Target right now, at present levels, knowing that the noise is less important than a trend showing Target stores are well-placed, often in higher-income areas, and that Target has fixed online problems Wal-Mart is only now getting to.

As to what my retirement account is actually doing, I'm holding CVS.

Disclosure: I am/we are long CVS.

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.