Target: Ideal Buy-And-Hold Investment?

Sep. 28, 2017 6:21 PM ETTarget Corporation (TGT)15 Comments
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Bluesea Research


  • Target’s cheap valuation and high yield are often cited as the main reasons for a buy rating.
  • The stock has underperformed S&P 500 in the last 1-, 3-, 5- and 10-year time frame, and now it faces much stronger headwinds compared to the last few years.
  • It is highly unlikely that the stock will outperform the wider market as the pressure on margins continues.
  • Betting on Target in the current retail climate is a risky proposition and does not provide adequate returns to long-term investors.

Target (NYSE:NYSE:TGT) has seen a correction of close to 20% year to date. Its cheap valuation and high yield are often cited as attractive factors for value investors who want to use a buy-and-hold strategy. However, it looks more like a value trap, given the past performance and future challenges. The recent initiatives of massive price cuts, heavy seasonal hiring and increase in the minimum wage will also cause pressure on margins and future EPS growth.

Target's performance in comparison to S&P 500 in the last few years has been very weak. In the last one-, three-, five- and 10-year time frame, the S&P 500 has shown total returns of 20%, 32%, 95.5% and 99%, respectively. On the other hand, in the last one-, three-, five- and 10-year time frame, Target has shown total returns of -11%, 5.5%, 7.8% and 22%, respectively. This performance shows that the market has consistently given it a pessimistic rating.

The future fundamentals for the company do not look quite strong. Most of the retail commenters were hinting at a "retail slump" from 2014 to 2016, which signified falling comp sales and margins for brick-and-mortar stores. In the last few months, they have started using the term "retail apocalypse" to highlight the rapid closures of stores, falling revenues and the need for increasing price cuts by retail stores to attract customers.

Amazon (NASDAQ: AMZN) is still growing at over 25% in U.S., which will continue to shift tens of billions of dollars in sales from the retail stores to the online channel. Target would need to answer if there is a third place available after Amazon and Wal-Mart (NYSE:WMT) for a full-scale discount chain. Wal-Mart has 2.5 times the number of stores that Target has in the U.S. and pulls in 5x Target's net income. This

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Bluesea Research profile picture
I have worked in the technology sector for over 4 years. This included working with industry stalwarts like IBM. I have done my MBA in finance and have been covering various blue chip stocks for the past 6 years. Having hands-on knowledge in the technology sector has helped me gain valuable insights into the ups and downs of this sector and predict winners and losers more accurately.

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

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