Is Target Worth Investing In?

With shares of Target (NYSE:TGT) trading around $62, 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 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, making it an efficient shopping experience for consumers throughout the nation.

Target prepared for the kickoff to the lucrative holiday shopping season for months, but nothing could have prepared the retailer for this. According to Reuters, Target alerted customers on Thursday that data from about 40 million credit and debit cards might have been stolen from shoppers at its stores during the first three weeks of the holiday season, starting on the day before Thanksgiving. The retailer said that it identified and resolved the issue on Sunday, and an investigation is currently underway. Following the announcement, Target’s shares fell as much as 3.2 percent before the opening of trading on Thursday.

T = Technicals on the Stock Chart Are Weak

Target stock has recently been pulling back over the last couple of quarters after reaching all-time highs. The stock is currently trading in the low end of its range and may need time to stabilize before heading higher. 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

20.18%

70%

68%

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

Put IV Skew

Call IV Skew

January Options

Steep

Average

February 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 very significant 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?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-43.75%

-10.38%

-25.96%

0.81%

Revenue Growth (Y-O-Y)

1.95%

2.01%

-0.95%

6.76%

Earnings Reaction

-3.45%

-3.60%

-4.01%

-1.45%

Target has seen decreasing earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have not been too happy 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 (NYSE:KSS), and sector?

Target

Wal-Mart

Costco

Kohl’s

Sector

Year-to-Date Return

5.02%

13.57%

19.78%

26.92%

17.32%

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 alerted customers on Thursday that data from about 40 million credit and debit cards might have been stolen from shoppers at its stores during the first three weeks of the holiday season. The stock is currently trading lower and may need some time to stabilize. Over the last four quarters, investors in the company have not been pleased, as earnings have been decreasing while revenues have been rising. 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.

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