Target Leading Rebound In Retail

Summary

• Shares of Target stock rose nearly 5% in trading today.
• The retail sector has lagged the broad market considerably year to date.
• Select retail stocks may offer value-oriented investors among the most attractive risk-adjusted return prospects.

It’s one day, so let’s not get ahead of ourselves here, but shares of Target (NYSE:TGT) closed trading today up 4.80%, leading the beleaguered retail sector higher. Coming into today, Target was down -28.15% year to date and over -28% over the trailing one-year period. To put this into perspective, Wal-Mart (WMT) was up 8.47% YTD and 3.75% over the past year, and the S&P 500 was up 10.32% and 15.92%, respectively.

The landscape for retail in general has not been pretty, as traditional brick-and-mortar stores have continued to struggle to adapt to the demands of online consumers and increased competition in the space. Share prices of many well-known retailers have struggled in this environment.

Consider the returns of the following prominent retailers over the past six months (ending June 30, 2017):

• Target: -26.14%
• Macy’s (M): -33.20%
• J.C. Penney (JCP): -44.04%
• SPDR S&P Retail ETF (XRT): -6.98%
• S&P 500 Index: +9.34%

Today’s move comes on the heels of Target’s announcement this morning providing guidance for a “modest increase” in same-store sales in its current quarter ending July. Previously, the discount giant had forecast a low single-digit decline. This marks the first time in five quarters that Target has forecast sales to increase, and it has inspired more buyers today to come into retail stocks.

Very few Wall Street analysts place much faith in Target at this point. According to Thomson Reuters, out of 23 analysts polled, the median rating is currently a hold, and only three rate it a buy. Then again, since when have analyst ratings been a leading indicator for stock performance? Far more often than not analysts rank stocks after they have moved, for better or worse. For value-oriented investors, retailers like Target may currently offer among the most attractive risk-adjusted return prospects.

Consider the following:

• Target pays investors a 4.9% Dividend Yield (the current yield on the 10-year Treasury is 2.35%)
• The stock has been crushed in recent years versus industry peers, and if nothing else, simple mean reversion would imply at least a short-term period of outperformance
• Target’s Forward P/E is 11.9 versus a trailing five-year average of 15.1 (21% historical discount), and trades at a 35% discount to the Forward P/E of the S&P 500 (18.3)
• Target's Price/Sales ratio is 0.4, considerably cheaper than the S&P 500 Index average of 2.0, and 33% cheaper than the discount stores industry average of 0.6
• Based on Trailing P/E, TGT trades at a 46% discount to its discount store industry peers

We don’t try to get cute. We love stocks that have been beaten up, trade at a significant discount to industry peers, pay strong dividends, and maintain a solid balance sheet. Simple philosophies such as this have led us to receive a 5-star rating by Morningstar for our RCM Focus 20 Portfolio, and they can help other investors following a similar path. Our more nimble Focus 20 Portfolio recently increased our weightings in the retail sector to over 20%, but even retail exposure in our annually reconstituted AlphaGeneration Quantamental Value Opportunities Portfolio continues to hover around 10%.

The brick-and-mortar retail segment of the market has been under significant pressure over the past 6-12 months, and there is no question these companies will continue to face increased competition from online retailers in the coming years. However, for value-oriented investors, seeking to exploit strong risk-adjusted opportunities in what is becoming an increasingly expensive domestic market, negative sentiment in this sector appears to be overdone and opportunities await.

Analyst’s Disclosure: I am/we are long TGT, M, WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

This article is not intended to serve as a recommendation to buy any individual stock. Prospective investors may wish to consider consultation with a qualified financial professional.