🎯 Hitting the Target ($TGT)

Earlier this week Tim shared a post in the Macrodesiac Discord from Hedge Fund manager Thomas Lee in which he suggested that:

“Equities and risk assets on track for an ‘everything rally’ into YE” (year-end)

Tim asked:

What do we think?

To which I responded:

I think risk assets go higher whilst the fed and others keep printing and pumping but I want to be discriminating about what to buy and own.

So (that means) real businesses which are growing (the) top and bottom line if poss and with decent momentum too.

The reason for that is the music will stop at some point, and I want to be seated when that happens.

Ultimately Tim asked me to put my thoughts down on paper about what I would look for in a stock that met those criteria.

The stock that I referenced in our original conversation is US retailer Target Corp (TGT).

That’s not to say that there aren’t other stocks that tick the same boxes as Target because of course there are. It’s just that TGT exhibits the characteristics I am looking for so clearly.

So let’s look at some of those criteria. We'll divide into technicals and fundamentals.

Remember we're looking for stocks that are performing and can continue to perform well in a rising market but which we think can more than hold their own in one that is moving in the opposite direction.

Let’s start with a look at price action in Target and specifically momentum.

In the table below we can see the number of new highs that Target has made over a variety of time frames ranging from short to very long term.

(Barchart data) 

Let’s concentrate on the recent past. As we can see it has posted 53 new highs in 2021 so far with 39 of those highs coming in the last quarter, and 12 in the last month alone.

Over those three months the stock is up by +25.70% and over 6 months those gains extend to more than +38.0%

We can make that nearly +49.0% if we expand the period of observation out to the year to date.

OK, we have established that Target has exhibited short to medium-term momentum but what about over the longer term?

Well, over the last 5 years the stock has appreciated by 275%

We have seen how Target has performed in isolation. How about some context for that performance?

To provide that I will return to the conversation that was the inspiration for this article and draw the same chart I drew then, which plots the % change,over the last 9 months for Target (in black), the S&P 500 index (in red) and the USA Quality Factor Ishares Edge MSCI ETF, (ticker QUAL) drawn in blue.

I choose that ETF because it’s my contention that Target is a “quality stock”.

It may not meet the quantitative/ Fama French definition of quality (to be honest Ihaven’t checked) but that isn’t really the point, I just wanted to illustrate Targets outperformance against two of the bluest blue-chip benchmarks...

If you were minded to, you could draw similar charts, and run your own qualitative screens to show how many factor ETFs target has beaten (or not) over this time frame.

Time to turn to the fundamentals of Target and for this, I have compared the stock to some of its direct competitors in the world of retailing namely Costco, Kroger and Walmart.

I have highlighted areas where Target exceeds its peers and which stand out to me:

Revenues have grown at Target by +26.80% over the last five years. A slower rate of growth than that of Costco but better than that seen at Kroger and Walmart.

However, it is the next line down that really catches the eye that of 5-year earnings growth, where Target scores 100.85%, far exceeding the competition.

Sales have been growing but the money that Target has been making on those sales has been growing at an even faster rate.

This means that Target has been more profitable over that period. In fact if we look at the relative profit margins for the groups it’s no surprise to see that Target is the clear winner.

Other boxes that get me excited are the low price to earnings growth ratio, the high return on assets figure and the modest dividend payout ratio. This tells us that Target is not stretching its balance sheet to pay out investors. Oh yeah, and the dividend has grown by 24% over the last five years as well.

They say beauty is in the eye of the beholder (and maybe I am a bit smitten) but there is a lot to like about stock whose price is regularly appreciating, outperforming benchmarks & the competition while making all the right noises in its numbers.

You could say in fact that it’s hitting the target every time.

Of course, I would never use such a poor pun...