Why I sold January 2016 $60 Puts on Target.
Over the past week I initiated a position of selling January 2016 puts on Target(tgt) corporation . Although, I already own a position in the outright stock, I chose to sell puts because I believe Target's downside is limited. I will allow the trade to mature either through time decay or if there if there is an upward move in the Tgt.
I chose target because I believe the company to be undervalued and many of the current risks will dissipate over the next year.
Historically, Target was priced as a premium retailer due to its customer loyalty, calculated expansion policy and shareholder friendly policies. As Target begins to produce positive news and stabilize, the market should regain interest in this brand as a long term holding.
- Following a 21% dividend hike, the current yield is 3.6%. Assuming target retains it is 47 year history of raising dividends every year, even if they only raise the dividend in 2015 by 10%, the stock would be yielding 4% at current prices. Also, the average 5 year yield is 2.2%, which basis a long term evaluation, indicates target is trading at a bargain.
- Data breach: a one time event which will incur substantial charges, but it is only a one time event and once the problem is rectified, there should not be any substantial additional charges. Furthermore, customer's that ceased shopping at Target because of the data breach will slowly return.
- Finding a CEO: There is a trend that when companies precipitously lose top management without a replacement in the pipeline, the stock tends to lag. However, once a replacement is found at least in the near term, the market generally reacts positively.(MSFT,O)
- Canadian operations: this is a bit of a wild card. The latest Target announcements points to operations beginning to improve as Canadian operational losses are decreasing and sales and margins are increases. However, if the operations in Canada continue to lose money, this will be a constant lag on Target for years to come until they can completely exit the Canadian operations.
- Growth in internet and Mobile. Although, target arrived late to the online and mobile sales category, they have since improved their website and encouraged online sales through cartwheel which already has 7M users.
- Payout Ratio: 56%, which is slightly on the high side as I like to see payout ratio's less than 60% and tgt is approaching that number.
- P/E :>19 is a bit on the high side and prefer a number closer to 15.
- Stopped share buyback temporarily.
- As mentioned earlier Canada operations are still a mess and the eventual outcome and potential costs are not clear.
Conclusion: I believe target, like many other companies, was a popular well regarded name until it veered off course. For those with a medium - long term perspective, a rare buying opportunity is being presented.
Disclosure: The author is long TGT, MSFT, O.