Where Will Target Go Next?

With shares of Target (NYSE:TGT) trading around $55, 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.

Banks and big retailers are locked in a debate over the breach of consumer data that gripped Target during the holiday season. At issue is which industry bears more responsibility for protecting consumers’ personal information. The retailers’  argument is that banks must upgrade the security technology for the credit and debit cards they issue. The banks’ counterargument is newer electronic-chip technology wouldn’t have prevented the Target breach, thus, retailers must tighten their own security systems for processing card payments. The finger-pointing is coming from two industries with considerable lobbying might. Their trade groups have been bombarding lawmakers with letters arguing why the other industry must do more — and spend more — to protect consumers.

T = Technicals on the Stock Chart Are Weak

Target stock has been pulling back over the last couple of quarters. The stock is currently trading near lows for the year and may need time to stabilize. 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

25.16%

93%

90%

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

March Options

Steep

Average

April 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 rising revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about 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 (NYSE:KSS), and sector?

Target

Wal-Mart

Costco

Kohl’s

Sector

Year-to-Date Return

-12.30%

-7.82%

-6.98%

-12.80%

-8.97%

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

Conclusion

Target operates discount general stores across North America where consumers continue to enjoy their shopping experience. Banks and big retailers are locked in a debate over the breach of consumer data that gripped Target during the holiday season. The stock has been pulling back over the last couple of quarters and is currently trading near lows for the year. Over the last four quarters, investors in the company have had conflicting feelings, as earnings have been decreasing while revenues have been rising. 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.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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