3 Reasons to Be Bullish on Target

Target is facing mass scrutiny right now, causing investors and potential investors to run for the hills. Do you want to invest with the masses… or with the savvy?

Jan 14, 2014 at 11:35AM

Let's get the obvious out of the way before we get to the good stuff. Target (NYSE:TGT) was recently victimized by a data breach that affected up to 40 million customers. Wait a second... scratch that. After further investigation, let's make it 70 million customers.

Based on this event, Target now gave fourth-quarter comps guidance of negative 2.5%. Ouch! That's quite a drop from the previously expected flat comps for the quarter.

Furthermore, and as I have written in many other articles, Target is dealing with a decline in loyalty and positive sentiment, and it must contend with increased costs due to more hires to handle excessive call volumes, as well as increased costs for technological innovations to help better protect its customers. And let's throw in lawsuits for good measure, including two dozen from customers and one from Putnam Bank. To add insult to injury, the recent data breach has likely led to market-share gains for Wal-Mart Stores (NYSE:WMT), Amazon.com, and Costco Wholesale (NASDAQ:COST).

With all of these negatives, how could anyone possibly be bullish? Below are three reasons.

1. Target market
More than 50% of Target's customers are college graduates. Being that Target is a discount retailer, this might surprise you. But if you exclude discount-membership stores, such as Costco, can you think of any discount retailer that caters primarily to this market? It's possible I'm drawing a blank, but I can't. People with college degrees are likely to earn more money than those without college degrees. Therefore, Target attracts more people with spending power than peers like Wal-Mart. This fact alone gives Target strong growth potential, especially if it can find high-potential markets for expansion.  

2. Fighting off a major threat
If you exclude the data breach, you will see that Target successfully fought off the showrooming threat. How? During the holiday shopping season in 2012, it offered price matching. Price matching was once again available during the 2013 holiday shopping season, from Nov. 1 to Dec. 21. If you could find a product for less at a competitor, Target would match the price. The showrooming threat died. 

3. Technological advancements
Target opened its technology innovation center in San Francisco in May 2013. This led to the Target Awesome Shop, a site where the most "pinned" Target items and highest-rated products on Target.com are showcased. The concept is simple: Customers are choosing from what other customers think are the most impressive Target products.

Another technological advancement: A Bullseye View. This is a Target blog that offers information on topics such as fashion and beauty, lifestyle, and entertainment. You can also find company news. The blog is in its infant stages, and it puts Target in the information space as well as the retail space. If Target can make this site primarily focused on popular topics and provide quality content, it could end up being a revenue driver in the future.

A final technological advantage for Target is that it consistently tracks customer habits through credit card and REDcard purchases, as well as via in-store Wi-Fi. This allows Target to improve its merchandising and to offer customer-specific offers.  

Taming the bull
Here's the point. Which do you think will last longer: the data breach leading to negative sentiment or the three positives listed above? Of course, the latter. That said, if you're looking for a short-term trade, then Target isn't for you. Target is likely to suffer from the data breach in many ways. The key is that this storm will pass. If you would prefer to invest in a discount retailer that offers both short- and long-term potential, then you might want to consider Wal-Mart or Costco.

Wal-Mart caters to a much wider audience, and its total sales are four times that of Target. If Wal-Mart continues its geographic expansion, and in many different forms (Wal-Mart Market and Wal-Mart Express included), then Wal-Mart should continue to grow. And the recent data breach situation at Target is likely to give Wal-Mart a little boost in sales. But Costco has been even more impressive.

Costco recently reported December sales, and not surprisingly, they were impressive. Sales increased 6% to $11.5 billion year over year. If you look at the big picture, an 18-month time frame, sales also jumped 6%, to $38.3 billion. All-important comps were also impressive, growing 3% in December as well as 3% over an 18-week period. This indicates customer loyalty. 

The bottom line
This exact moment isn't the best time to invest in Target. However, you should have a good opportunity to invest in Target at an appealing discount at some point over the next several months. Target's data breach will be the primary culprit for a likely sell-off in the stock price, but it will still eventually be a passing event. Target's innovative ways should make it a long-term winner.

If you would prefer to invest in a larger enterprise that can withstand just about anything aside from a nuclear war, then you might want to consider Wal-Mart. Thanks to significant cash flow generation, your dividend payments are safe. And Wal-Mart should continue to see slow and sustainable growth thanks to its enormous customer base and new store formats.

As far as Costco goes, it should be appealing to any investor. Its business model has proven to be highly effective, comps are growing in a difficult consumer environment, and growth has been consistent for years. 

Massive potential in a growing market 
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Fool contributor Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers