Is Target the Next Wal-Mart?

With shares of Target (NYSE:TGT) trading around $71, 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 guests to purchase products either online or by locating them 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 stores that make it an efficient shopping experience for consumers throughout the nation. Target stores will continue to be an excellent option for consumers looking for a variety of discounted items in one location.

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T = Technicals on the Stock Chart are Strong

Target stock has just recently broken above a long-term resistance level. The stock is now trading at all-time high prices and sees no signs of slowing ahead. 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 above its rising key averages which signal neutral to bullish 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

20.46%

56%

52%

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

Put IV Skew

Call IV Skew

June Options

Flat

Average

July Options

Flat

Average

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

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

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E = Earnings Are Increasing 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?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

1.39%

17.07%

2.91%

5.05%

Revenue Growth (Y-O-Y)

6.76%

3.23%

3.33%

5.83%

Earnings Reaction

-1.45%

1.72%

1.76%

0.43%

Target has seen increasing earnings and revenue figures over the last four quarters. From these figures, the markets have been upbeat about Target’s recent earnings announcements.

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P = Excellent Relative Performance Versus Peers and Sector

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

Target

Wal-Mart

Kohl’s

Costco

Sector

Year-to-Date Return

18.22%

14.33%

21.22%

13.06%

13.21%

Target has been a relative performance leader, year-to-date.

Conclusion

Target provides a variety of discounted general merchandise through its popular retail stores. The stock has recently broken above a long-term resistance level and is now consolidating at all-time high price levels. Earnings and revenue have been growing steadily which has generated positive buzz among investors. Relative to its peers and sector, Target has been a year-to-date performance leader. Look for Target to OUTPERFORM.

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