Does Target Have a Bright Future?

With shares of Target (NYSE:TGT) trading around $57, is TGT an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Target operates general stores in the United States as well as online, where it sells merchandise at discounted prices. It operates in three segments: U.S. Retail, U.S. Credit Card, and Canadian. Target’s online presence is designed to enable consumers to purchase products either online or by locating items in one of its stores with the aid of online research and location tools. Groceries, clothing, household items, and general merchandise can be found at Target, making it an efficient shopping experience for consumers throughout the nation.

Target says it’s fixed a technical issue that caused delays at registers in some U.S. stores, but stressed that the glitch was not related to a recent data security breach. The retailer sent a message from its Twitter (NYSE:TWTR) account late Sunday as shoppers took to social media to complain. The Minneapolis company did not immediately respond Monday to questions from The Associated Press about what led to the incident or how many stores were affected. The glitch comes as Target grapples with the fallout from a massive pre-Christmas security breach that compromised the credit cards and personal information of millions of customers and exposed a huge security flaw. The breach has damaged Target’s reputation with customers who are worried about their personal information. Last month, the retailer cut its annual profit outlook and first-quarter earnings fell 16 percent. The company’s fourth-quarter profit fell 46 percent. Target is overhauling its security and technology departments and its systems. In late April, it ousted its CEO and is now looking for a new leader.

T = Technicals on the Stock Chart Are Mixed

Target stock has struggled to make significant progress over the last couple of years. However, the stock is currently moving higher and looks set to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Target is trading below its rising key averages which signal neutral to bearish price action in the near-term.

TGT

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Target options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Target options

18.85%

30%

28%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Steep

Average

August Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Target’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Target look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-14.29%

-44.99%

-43.75%

-10.38%

Revenue Growth (Y-O-Y)

2.03%

-5.32%

1.95%

2.01%

Earnings Reaction

1.04%

7.04%

-3.45%

-3.6%

Target has seen decreasing earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Target’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Target stock done relative to its peers, Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST), Kohl’s (NASDAQ:KSS), and sector?

Target

Wal-Mart

Costco

Kohl’s

Sector

Year-to-Date Return

-8.82%

-4.52%

-3.34%

-7.10%

-4.94%

Target has been a poor relative performer, year-to-date.

Conclusion

Target operates discount general stores across North America where consumers continue to enjoy their shopping experience. The company says it’s fixed a technical issue that caused delays at registers in some U.S. stores. The stock has struggled to make significant progress, but is currently moving higher. Over the last four quarters, earnings have been decreasing while revenues have been increasing, which has produced conflicting feelings among investors. Relative to its peers and sector, Target has been a poor year-to-date performer. WAIT AND SEE what Target does the rest of this quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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