Name That Trade $TGT – Target Practice

by Enis May 24, 2013 2:14 pm • Commentary

Target had its largest single volume day since Jan 2012 after a weak earnings report this week.  The stock closed 4% lower on Wednesday after earnings, just after making a new all-time high on Tuesday.  The stock has bounced back a bit the last 2 days, and the volatility this week got me interested in the name.  

Target is a 15.5 P/E retailer projected to grow earnings at 5-15% over the next 3 years.  It pays a 2% dividend and is a $45 billion market cap company, one of the largest retailers in the U.S.  It gets all of its revenues from the U.S., and has been a stalwart in the value retail space for more than a decade now.

Similar to WMT, which I traded last week, Target is priced much more cheaply than the vast majority of consumers staples stocks.  As I mentioned in my macro wrap last week, the search for safety has bid up staples and utilities stocks to risky valuations, leaving few stocks in the arena that are good value.  I view TGT, like WMT, as one of the few that still offers a decent valuation.

The technical picture could be interesting as well.  The stock experienced a failed breakout to new all-time highs this week, shown by the 7 year weekly chart:

[caption id="attachment_26273" align="alignnone" width="647"]TGT 7 year weekly chart, Courtesy of Bloomberg TGT 7 year weekly chart, Courtesy of Bloomberg[/caption]

After the earnings miss this week, I don’t expect that TGT has the necessary energy to break back above $71 for some time to come.  However, the stock is a better relative value compared to most of its peers, so investors needing a safe hideout are likely still going to own or buy the name.  With that in mind, I am looking for a good spot to enter a long delta position.  The 1 year chart shows the importance of the $65-$66 area:

[caption id="attachment_26274" align="alignnone" width="635"]TGT 1 year daily chart, Courtesy of Bloomberg TGT 1 year daily chart, Courtesy of Bloomberg[/caption]

The horizontal red line at 65 marks the breakout spot for the stock in early March, and significant support that is also near the 200 day moving average currently at 64.40.  In the near term, the 50 day moving average has flattened out, likely signaling the end of the near term uptrend.  But I would get interested in a new long position in the 65-66 area.

In the meantime, I’m going to watch and wait.  TGT implied volatility is quite low (only 17 even all the way out in October), so if TGT does reach that buy area, I will likely just buy a simple call, similar to what I did with WMT.