Is Target a Safe Investment?

With shares of Target (NYSE:TGT) trading around $58, 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 is asking customers not to bring guns into its stores, even in states where it’s legal to do so, joining Starbucks (NASDAQ:SBUX) in seeking to keep shoppers and workers comfortable. The second largest U.S. discount retailer said in a statement on its website today that while it will follow local laws, it will “respectfully request” guests not bring guns into stores to maintain a “safe and inviting” atmosphere. “Bringing firearms to Target creates an environment that is at odds with the family-friendly shopping and work experience we strive to create,” Chief Executive Officer John Mulligan said in a statement on the retailer’s website. Target’s request echoes one Starbucks made in September, when it also asked customers to stop bringing guns into its cafes. Seattle-based Starbucks had been embraced by gun-rights activists because it tolerated firearms in its stores and some had used its cafes as political stages for media events. Firearm legislation varies from state to state in the U.S., and even from building to building. For example, in South Carolina and North Carolina, people can carry guns in bars, while Arkansas allows guns in some houses of worship and their affiliated K-12 schools.

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 surging higher and looks poised 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 between its rising key averages which signal neutral 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

16.79%

0%

0%

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

Put IV Skew

Call IV Skew

August Options

Average

Average

September Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral 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 rising revenue figures over the last four quarters. From these numbers, the markets have been pleased with Target’s recent earnings announcements.

P = Average 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

-7.19%

-3.81%

-3.03%

-7.37%

-4.35%

Target has been an average performer, year-to-date.

Conclusion

Target operates discount general stores across North America where consumers continue to enjoy their shopping experience. The company is asking customers not to bring guns into its stores, even in states where it’s legal to do so. 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 left investors pleased. Relative to its peers and sector, Target has been an average 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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